Monday, January 23, 2012

The Problem with Winning

Most of us like to win.  Winning feels good, winning means we got the prize, winning...well, it sure beats losing.  A drive to win can sometimes be very useful in negotiations.  It can keep us sharp and aggressive and help us resist tactics designed to draw out unnecessary concessions.  The best hagglers are often people who take a great deal of pleasure in winning, and I don't think that's coincidental!  Unfortunately, the desire to win (and particularly our aversion to losing) can also hurt us in negotiations. Knowing how to harness your desire to win is a critical negotiation skill.

A Focus on Winning Can Distract us from our Interests

The goal of negotiation is to meet our own interests as well as possible.  If that's true, then winning or losing is virtually irrelevant.  Suppose you had to choose two deal outcomes.  One gives you a value of 100 happiness points.  The other gives you a value of 50 happiness points.  Which outcome do you prefer?

Does your answer change if you know that in the first case the same deal gave me 500 happiness points and in the second case it gave me 40?  Hopefully not -- but in my experience many people prefer the second outcome (where they "win") to the first (where their interests are better met but they "lose").

If we're engaging purely in value claiming then this doesn't really apply.  If the game is zero-sum, then if I get more than you it's entirely likely that you could have achieved an outcome that would have better met your needs.  But winning is still a sideline; what matters is how well your interests were met compared with the range of achievable outcomes.

I recently interviewed a man who negotiated the sale of drilling rights for natural gas on his property.  He and a group of other landowners joined together in an association and hired an expert attorney to negotiate on their behalf.  First, of course, they had to negotiate with the attorney.

In order to align the attorney's incentives with their own, they agreed to give him a percentage of whatever up-front payment was negotiated (above a floor level).  They deliberately didn't include any incentives on the royalty payment.  (A typical deal includes some per-acre up front payment followed by annual royalty payments which are a percentage of the value of gas that is harvested from the field.) When I asked why, he explained that the royalties are where the real money was, so if they gave the attorney any percentage of that it could turn out to be a huge amount of money.

The deal they'd signed was for 20% gross royalties, i.e. for every $1 of revenue from natural gas the landowners would be paid twenty cents.  I asked him why they couldn't have done a similar incentive system on royalties, e.g. giving the lawyer some percentage of any royalties beyond 20%.  For example, if they gave him 10% of any additional royalties and he negotiated a rate of 22% then they would get 21.8% and he would get 0.2%.  The reason was that that 0.2% could turn out to be much more than they would want to pay, but of course they would only be paying it if they in turn were getting $9 for every $1 the attorney got.

The landowners were happy with their attorney getting paid well for getting them a good deal but they based their strategy in part on a desire not to "lose" by paying the attorney a fortune.  This may have caused them to miss an opportunity to create a true "win win" whereby the attorney could make a fortune but only by making them a bigger one.  (This, by the way, is the only criticism I have of the way they approached the deal -- from what I can tell they got a very good outcome through a combination of thorough preparation and a very healthy approach to the deal.)

Competition can be Disastrous

One of my negotiation professors often begins his seminars with what game theorists call a dollar auction.  The rules are simple:

  1. The auction is for a $100 bill.
  2. The first bid must be for exactly $5 and every subsequent bid must be exactly $5 higher than the current high bid.  Thus, the bidding will go $5, $10, $15, etc.
  3. Bidding continues until the high bid stands for ten seconds.
  4. The winner pays his or her bid and receives $100.
  5. The second-highest bidder also pays his or her bid but receives nothing.
Typically there will be a lot of people interested in bidding low amounts.  When the bidding reached $40 or $50 there are typically only a few people bidding, but no one seems particularly worried.  When it gets to $80 or so the remaining bidders generally recognize that they're in a trap.  The problem is that since the number two bid also pays there is always an incentive to keep bidding.  For example, if your bid is $80 and the high bid is $85 you can either lose $80 or bid $90 at which point you stand to make $10...except of course that now the same incentive pushes the other party to bid $95.

Once the bidding goes over $100 there's typically a chuckle in the room.  Both bidders (there are rarely more since three people bidding will let one escape the trap) are now losing money but both have the same incentive to keep bidding.

Typically at some point below $200 one of the players gives in.  But not always.  He has seen auctions continue past $1,000 when both people are unwilling to lose.  Of course, by almost any rational measure two people who lose a lot of money purely because they don't want someone else to lose less money aren't exactly winning.

A focus on winning can make value creation harder.  It can blind us to opportunities to find mutual benefits or creative solutions to problems.  At its worst it can cause negotiations to break down or negotiators to engage in mutually destructive behavior, all in the name of coming out ahead.  By all means, use your killer instinct but beware that it doesn't dominate your negotiations.


  1. In board game speak, I think that negotiators too often view a deal as a direct game vs their opposite number.

    It's more useful to see it as a single move in a game - you are much better off maximising your own benefit, rather than your relative position vs the other side.

  2. Agreed, but I think even that doesn't quite go far enough. In a game you're often happy to make even gains but would balk at an opportunity to gain X that gains 5X for another player. It still leads to a sense that your gain is my loss.

  3. Ah! True - because we are 'playing' with vastly more players than any actual game. If there were 5 negotiators in the world, and you made 5X versus my X, I would expect you to win if I kept giving you those deals. (in terms of job offers, working conditions, pay grade).

    With a million players, if I keep making the 1:5 trades, and noone else does, I come out way ahead.

    In case it isn't obvious, I followed you here from BGG. I read your entire back catalogue in one evening - really enjoy your writing.