January 26, 2009

The Instinctive Offer

From the Archive: Negotiators who rely on their feelings often come out ahead.

Topics: Marketing

Conventional wisdom dictates that the best way to approach an important decision is to do so analytically — by, for example, considering potential outcomes and listing the pros and cons of each possible course of action. Yet research has shown that decisions, both personal and professional, are often made instinctively and subjectively. Rather than evaluating the potential outcomes of various options, people often rely on how different options make them feel.

In the world of business, decisions are frequently reached through negotiations that involve high financial and strategic stakes. Negotiations can be complex: All parties are usually inclined to come away from the table having advanced their positions. At the same time, offers are rejected and accepted for various underlying reasons — for example, pride, the drive to win, or preserving a relationship may trump other factors.

Should parties to a negotiation embrace a calculating, analytical strategy, or should they rely instead on their instincts and feelings? To examine how the reliance on instincts and feelings influences negotiations, Professor Michel Tuan Pham, working with doctoral candidate Andrew Stephen, used a classic negotiation game called the ultimatum game.

In this game, one person is assigned the role of proposer and must divide a given amount of cash with a second person, the responder. If the responder accepts the offer without negotiating, both players can keep the money. If the responder rejects the offer, both players walk away empty-handed. The game simulates real-life negotiations in which both parties need something from each other and have an incentive to reach a deal.

In a series of experiments, the subjects were divided into two groups and subtly encouraged or discouraged to rely on their feelings using a novel research technique known as the trust-in-feelings manipulation, which was developed in collaboration with Tamar Avnet, PhD ’05, of Yeshiva University. One group was asked to think of two instances in which they trusted their emotions when making a decision and the outcome was favorable. Because it is relatively easy for most people to think of a few such instances, this group was likely to trust their feelings and emotions when making decisions. The other group was asked to recall 10 such instances. Because it is more difficult to think of many such instances, this group was likely to distrust their emotions when making decisions.

The subjects were then asked to play the ultimatum game, taking the role of proposer. They were led to believe that they were playing against a real online responder, although they were in fact playing against a preprogrammed computer.

“The results were intriguing,” Pham says. “The participants who were encouraged to trust their feelings offered somewhat less money than those who did not trust their feelings, but their offer still fell in a range that was likely to be accepted. Those who trusted their feelings apparently selected their offer based on whether the amount ‘felt right’ given the situation rather than on the probability that it would be accepted or rejected.”

Relying on such emotional instincts may simplify the negotiation process. “When the participants were primed to trust their feelings, they saw the negotiation in simpler terms, rather than as a complex, strategic task,” Pham explains.

“Interestingly, negotiators who were guided by their emotions did not fare worse than the others financially,” Pham says. “They ended up with at least as much money, and often more, than their calculating counterparts, suggesting that emotional decision making may be not only simpler but also more lucrative.”

Michel Tuan Pham is the Kravis Professor of Business in the Marketing Division at Columbia Business School.

Read the Research

Michel Tuan Pham

"On Feelings as a Heuristic for Making Offers in Ultimatum Negotiations"

View abstract/citation  Download PDF  

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