"I once killed a $125 million deal by being too honest." - priceless negotiation lessons

 Ali Partovi on Twitter -October 18th 2021

I once killed a $125 million deal by being “too honest.” There are many ways to lose deals, lest you think last week’s story was my only painful blunder. This one hinged on a fateful encounter with Jerry Yang and involved Paul Graham (@paulg). Here’s what happened

In 1998, I was a 25-year-old with dreams, running my first startup with Tony Hsieh, Sanjay Madan, & Alfred Lin (@Alfred_Lin). Our company, LinkExchange, was the web’s largest ad network. My ultimate dream was to partner with Yahoo, the era’s dominant search engine. I pitched Yahoo our concept, “Keywords”: targeted text ads on search results. I was obsessed with search ads and tried to convince Yahoo they’d be better than banner ads. (This was pre-Google.) After more than a year of pitching, Yahoo took the bait. They expressed interest in acquiring LinkExchange.

Meanwhile, I had a backup plan (Batna ! ). If a Yahoo deal didn’t materialize, we’d join forces with Viaweb, an awesome younger startup whose ideas complemented ours. Their people were brilliant, and they’d built a system to monetize search via e-commerce commissions. Over multiple trips to Cambridge, I wooed Viaweb and their CEO Paul Graham. While we each hoped to partner with Yahoo, I shared my vision of what we could build together instead. I proposed merging our startups. They seemed interested, and we hashed out rough terms.

When it rains, it pours. Just as our talks with Viaweb were nearing fruition, Yahoo offered $125 million to buy LinkExchange. As a financially-insecure immigrant, I knew this deal would change my life. It was more money than I’d ever imagined. We signed Yahoo’s offer, which required us to cut off all other talks (eg with Viaweb). Such deals can take a month. I couldn’t contain my excitement. I told my roommates Alan and Mike, who also worked with me. We discussed it day and night. We fantasized about building search ads with Yahoo. I fantasized about buying a house for my parents. Meanwhile, I hoped to keep the Viaweb door open. It wasn’t easy. I had to ghost Paul. I wasn’t allowed to respond to him, and I wasn’t allowed to tell him why.

Then came the momentous encounter. On the eve of signing the definitive final agreement, I met for drinks with Yahoo founder Jerry Yang, undisputed king of the Internet at the time.

I told Jerry how excited I was to join Yahoo. In my excitement, I told him that together we should also acquire this smaller startup, Viaweb. With Viaweb’s incredible tech and team, we could make Yahoo Search a powerhouse.

Jerry’s response was lukewarm. First, he had zero zeal for the search business. Second, he’d already heard of Viaweb: “Our guys looked at them. We weren’t that impressed with their people.” In hindsight, this should have been my cue to shut up. I’m not sure what compelled me to speak. Maybe it was that I already considered myself on Jerry’s team and wanted to help Yahoo. Maybe it was that I knew Viaweb’s people were incredible, and I couldn’t let a mistake go uncorrected. Maybe it was the alcohol. “Jerry, your guys are wrong: the Viaweb team is amazing. Their engineers are probably better than yours,” I said. Then, I stupidly added, “They are hands down better than us.”

ps: we all make mistakes. Don't beat yourself about it 😉

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“Interesting,” replied Jerry Yang. “Maybe we should take another look at Viaweb.” A few days later, Yahoo called off buying my startup, citing an accounting technicality. I read it over and over in disbelief. Was there secretly another reason? Either way, goodbye, $125 million. It was devastating. All our employees heard, and it took the wind out of our sails. I told my roommates the whole story, and they agreed that I was an idiot. Dejected, I began trying to revive our backup plan with Viaweb.

I messaged Paul at Viaweb, and he didn’t reply. Desperate, I sent him one email after another. It felt like Paul was now ghosting me. A few weeks later, we read the news: Yahoo had acquired Viaweb. It didn’t take me long to connect the dots. I’d been in love with both companies, and I’d lost both. (great learning, this!)

I rehashed this experience for months as we tried to recover from the blow. One lesson I learned: a deal isn’t done until it’s closed. No matter how much you want to be on the same side of the table as the other party, don’t show your cards until the game is over. (Read again. Did you? Now read once more! No lesson is more important....)

Listen to the body language and tone and respond. Listen.

Another lesson: be patient and learn when to keep my mouth shut. I’m still working on this lesson.

There are things I’m proud of in this story. While it was financially devastating and I let down our team, at least I didn’t lose anybody’s trust. My intentions were good, if naive. I helped both Yahoo and Viaweb. Business isn’t just about winning; it’s about helping others.

Also, I was right about search ads.

The lessons proved helpful 6 months later when Microsoft offered $265M for LinkExchange. We didn’t want to lose another deal. Lest they change their mind, we deliberately left some positive surprises for Microsoft to discover in due diligence. This is a story for another day.

P.S. As it turns out, Paul Graham later shared that perhaps being acquired by Yahoo wasn’t that great. tp://paulgraham.com/yahoo.html It’s no wonder he left Yahoo and went on to start @YCombinator

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Planet of the Apes. Us. Or Them?

 If you have ever worked in teams, this one is for you.

In my first organisation, we had two offices, one in Mumbai and the other in Bangalore, which, in turn, had two teams with mutually exclusive responsibilities.  Right away, in the first month, I sensed that Mumbai and Bangalore shared a relationship – if you could use the word ‘share’ without squirming – that was frosty, with each out to prove a point.  Of course, nobody did (prove a point, or anything else for that matter).  Bangalore saw it fit to sneak into Mumbai’s territory and vice versa and the Big Boys in office either slept away or were dumb enough to believe that such competition was healthy or, even worse, encouraged all of this.  There was bad blood all around, and it was not due to the poor oxygen in the cities, stay assured.

Then things changed.  For the worse.  The two Bangalore teams got their mutually exclusive roles removed and each began to poach into the other’s territory – here the managers were decidedly complicit and in a vengeful mood (and probably carried daggers under their belts into meetings).  While these two managers sought refuge in silos filled with their perceptions and understanding (or the lack of it), their underlings thankfully stayed – and continue to be – good friends and would roast these Men-Who-Matter over a mug of splendid beer (they cook better over beer than on a barbeque). 

Among the fascinating (and regrettable) outcomes of having a social primate lineage is the human proclivity to classify people as Us or Them, those in the in-group being Us and others in the out-group, Them.

We believe that
a)    In order to survive as individuals, we must get along with Us – this led to the evolution of the moral sentiments of empathy, cooperation and altruism…..
b)    …..but we have little need for Them, which, in turn, led to the evolution of animosity, disgust and xenophobia and thereon to violence, competitiveness and selfishness.

There is no better illustration of this than the now-classic Beer Game, first developed by Professor John Sterman in the 1970s.  If you would like to read about the game, go ahead, else skip the next two paragraphs…. 

The game is played on a board that portrays the production and distribution of beer. Each team consists of four sectors: Retailer, Wholesaler, Distributor, and Factory arranged in a linear distribution chain. A small team manages each sector. Coins stand for cases of beer. A deck of cards represents customer demand. Each simulated week, customers purchase from the retailer, who ships the beer requested out of inventory. The retailer in turn orders from the wholesaler, who ships the beer requested out of their own inventory. Likewise the wholesaler orders and receives beer from the distributor, who in turn orders and receives beer from the factory, where the beer is brewed. At each stage there are shipping delays and order processing delays. The players' objective is to minimize total team costs. 

As the game settles down, we notice loyalties to one’s small team emerging, often at the cost of the larger team.  People begin to protect their own turf, blame others and consider everyone else to be, well, Them!  The Big Bass (that’s a boss who makes needless sound) then takes some decisions: to fire his direct reports, for instance, when it is clearly not their fault, for they are cogs in a system and conform to the expectations of behaviour.  At the denouement, it is always always the case that teams end up with some egg yolk on their collective nozzle.  The Beer Game remains the Gold Standard in Systems Thinking and has a whole chapter devoted to it in The Fifth Discipline by Peter Senge (read the book sometime, will you?  Not easy, for the writing is hardly engaging, but worth it for the lessons.)

Over two decades of running the Beer Game and another superb simulation based on the Prisoners’ Dilemma, I have learnt much more than the participants: there is no substitute to cooperation amongst teams, but people cooperate only when they have exhausted all other choices (how dumb is that?).

Folks will only cooperate if they trust each other.

Trust is born out of communication, action and genuine intent.

....all of which must be in good faith and honest.

In their absence, we get competition of the usually-unhealthy sort.  Negotiations that are pinched with blame, innuendo, gaming and stealth. 

Yet, for most people, this is theory.

Have you seen Development teams and Testing teams hug each other? Or sales folks and delivery teams share a sandwich?  (If you have, take a bow, for that is the Aurora).  Robert Benchley, that brilliant humourist (check him out at by Googling for ‘Robert Benchley quotes’ and it’ll make your day) once said, “There are two kinds of people in the world: those who divide the world into two kinds of people and those who don’t.” 

There are more of the first. 

So, to end with a story that I got (from the book ‘Behave’ by Robert Sapolsky)…. 

Have the seen the original 1968 version of Planet of the Apes? Well, if you haven’t, you haven’t…..(missed anything.  It is an awful film – just look at the costumes).  In the film, an astronaut crew crash-lands on a strange planet in the distant future. Although the planet appears desolate at first, the surviving crew members stumble upon a society in which apes have evolved into creatures – chimps and gorillas - with human-like intelligence and speech. The apes have assumed the role of the dominant species and humans are mute creatures wearing animal skins (this bit on the far-fetched tale has been lifted from Wiki). 

Well, so here is the story, told by both the stars in the film, Charlton Heston and Kim Hunter which relates to the months during which the movie was made: at lunchtime, the people who played chimps in the film and those who played gorillas ate in separate groups.  

So, Us versus Them happens on other planets-in-distant-futures too.

 

 

 

 

 

 

 

 

 

The Survivorship Bias - a story and the lesson

This bias is best illustrated by a story (much of this is quoted from a super piece by Vivek Kaul in the Mint
https://www.livemint.com/mint-top-newsletter/easynomics20082021.html)

While fighting the Second World War, the British Royal Air Force (RAF) ended up with a very strange problem. It needed to attach heavy plating to its fighter jets to protect them from gunfire from the German fighter planes and their anti-aircraft guns. The trouble was that, since the plating was heavy, it had to be used sparingly at the right points of the aircraft, where the Germans were most likely to attack.

Jordan Ellenberg writes about this in How Not to Be Wrong: The Hidden Maths of Everyday Life: “The damage [of the German bullets] wasn’t uniformly distributed across the [British] aircraft. There were more bullet holes in the fuselage, not so many in the engines.”

What did this data suggest? It suggested that the chances of the plane’s fuselage being attacked were higher, and that was the part of the plane that seemed to be the most vulnerable. 
QED. 

Thankfully, the British didn’t go by what the basic reading of data suggested because they would have been totally wrong. Instead, they chose to hear out Abraham Wald, a statistician.
As Tim Harford writes in How to Make the World Add Up: “Wald’s written response was highly technical, but the key idea is this: we only observe damage in the planes that return. What about the planes that were shot down?”
This data wasn’t available to the British RAF. As Ellenberg writes: “The armour, said Wald, doesn’t go where bullet holes are. It goes where bullet holes aren’t: on the engines. Wald’s insight was simply to ask: where are the missing holes? The ones that would have been all over the engine casing if the damage had been spread equally all over the plane. The missing bullet holes were on the missing planes. The reason planes were coming back with fewer hits to the engine is that planes that got hit in the engine weren’t coming back.” They simply crashed. Hence, the planes were plated around the engine and not the fuselage as the data had originally suggested.

The original data in the British case had a survivorship bias built into it. It captured the bullet patterns of only those planes that made it back to the air force base and not every British plane that got hit by a German bullet.

Ellenberg explains this in another way: “If you go the recovery room at the hospital, you’ll see a lot more people with bullet holes in their legs than people with bullet holes in their chests. But that’s not because people don’t get shot in the chest; it’s because the people who get shot in the chest don’t recover.”

When someone (generally a smoker) defends the practice by giving you an example of an eighty-year old who smokes every day, it is the survivorship bias at work.  When people take examples of Steve Jobs and the rest of the start-up stars line-up as examples...well, there we go again.  

The way to eliminate the bias: for every plane that returned, count one that did not.

On selling iPhones 5,6,7….all the way to 12 (to people who do not need it)

The one thing that Apple can teach us (for better or, as I think, for worse) is to do the above: sell a product to someone who has an earlier version of it that is working perfectly fine. 

The formula (tried, tested, worked, repeated):

Price the new phone way more than required and do some ‘Bata-adjusting’ (please credit me when you use this phrase next

(Homo sapiens bias: Rs 79900 is way way lesser than Rs 80000!  At least, Apple did not charge that much, that would be overpriced by a mile). 

Tie-up with a bank to offer you a humungous cashback (which itself is the price of a not-so-cool smartphone)

(H-sapiens bias: 6k of cashback means that the folks at the bank want me to have this phone.  It is ordained in the Universe.  A larger force at work.  All for me.)

 

Then EMI the whole business to reduce it all to a couple of thousand a month

(H-s bias : it is the cost of just three biriyanis (which I shall never never give up, of course, but still, let me promise to try).  The iPhone 12 for 3 b’s a month, how cool is that?

 

Exchange value: 9k! 

(H-sapien: someone is paying me 9k for this piece of junk?)

A damp squib (i.e, me) interjects the thoughts:  "…er, but what about the 60k that you paid for this phone three years ago?"

(Homosapien: Only you can bring such logic in to ruin my day, but still, I must answer that question.  The 60k? That is a sunk cost.  It is history, sunk, incurred, gone.  And I have used my phone like, well, like I use my lungs.  So there.)

 

Exchange Bonus: the icing on the cake (dark choc and cream)

(H-s bias: can you believe this?!  All because I owned an iPhone earlier?  Wow, Apple loves me.  This is unreal!) 

ps: the small print says that you give in your 128 GB iPhone 7 and pay a fortune to get half of that storage capacity. But no one – not humans certainly – cares a fig leaf and its mother-in-law for small print.

 

Exchange effective price:

(Homosapien conclusion: now affordable at only 61900, whew!  I did feel guilty about this exchange but Apple saves the day. I promise to pay alimony if I ever buy another phone.)

So, go fly a kit, you damp behavioural squib.

I will trade-in and feel guilt-less.
And I will buy again.

No, not an Apple a day – even humans haven’t reached there yet. 

A mattress takes on Schelling....and Schelling's take on the mattress!

If you have not heard the podcast, Hidden Brain, I strongly recommend it.  On it the other day, was an excellent interview with George Marshall, the author of Don’t Even Think About It: Why Our Brains Are Wired to Ignore Climate Change.

Marshall points out that humans are not tuned to deal with future events, but would instead focus on the present.  What does this mean?
a)       If we can postpone a cost to the future (even if it is likely to be higher), we will!
b)       Current rewards are preferable, so we act now to receive incentives.
c)       Uncertainty is uncomfortable, so we ignore it, more so when it is not direct, does not affect me or my family bang on (climate change is one, for a start)

Marshall talks about an experience we have all had that was told to him by the economist Thomas Schelling. 

One day Schelling got stuck in traffic on a two-lane road. The traffic moved slowly for 30 minutes and like all the other drivers, he wondered what was slowing everyone down. Finally he reached the cause of the delay – a large mattress was in the middle of the road and traffic both ways had to slow down and drive around it to keep going. Schelling wondered, as he drove by the mattress, why none of the hundred or so drivers that passed the mattress, including him, did not get down from the car and move it out of the way.

Why does this happen? Marshall and Schelling concluded that most of us drive by because we have already paid the cost (that is, the time we have lost) and there is no real incentive to stop and remove the mattress, only an intrinsic reward for helping the drivers behind us, most of whom will never know we did it.

However, what if you get down to move it out of the way?  Would someone help you? 
Possible. Even probable.  The driver behind you will help because he has nothing to lose, but a great deal to gain (time)!

Humans!      

Cold War Schelling - A Game of Chicken!

Dr Thomas Schelling was a different sort of Nobel-prize winning economist –let’s call him a ‘hatke’ economist - who worked on the fascinating science of game theory and its utility in the cold war and in nuclear strategy. He presented an unusual option in cold war negotiation – which remains as debated as it is controversial – that went as follows:

One side in a negotiation can strengthen its position by narrowing, not expanding, the options available to it. 

Imagine that there are two drivers driving towards each other on a collision course (I am getting nervous writing about it!).  One must swerve, or both may die in the crash.  But if one driver swerves and the other does not, the one who swerved will be called a ‘chicken’, a coward, the one who blinked first. 

     Your first reaction is likely to be, ‘…but this will never happen.  Humans love their lives way too much.’

Well, sorry to disappoint you, but it happened for half a century after the Second World War, when the two superpowers drove towards each other.  It happens – with lower consequences – in traffic jams, when people refuse to move and glare with hostility.  It happens in conflicts at home and at work. 

So, it happens. 

The fear of being labelled a chicken triggers the aggression (both emotions emanating from the amygdala).

So, ol’ Schelling suggested that one option could be that one of the drivers who is hurtling towards the other could rip the steering wheel from the steering column and brandish it so that his opponent can see that he no longer controls the car.

Have you done this? (no, not while driving, but while negotiating….)

1000 or 1500 ?

 Let me offer you a choice of a prize: I either give you a gift of Rs 1,000 or a gift of Rs 1,500 (absolutely no strings attached to either option). 
Please choose what you’d like.
Sounds silly?  Is there a possibility that you could opt for Rs 1,000?

Amongst my pet peeves (of which there are many) is one about how we all believe in humans being rational – Homo economicus.  If you have seen a post or two earlier, I tend to go on about it (which is pretty irrational, I agree).

In this blogpost is an example where you might just opt for the thousand in that example above and feel better about it.  It is about context.  Context.  Context.  

Michael Shermer in The Mind of the Market (a splendid book which I highly recommend) says: …studies show that when it comes to money, neither utility nor logic prevails.  Let us take one of Nobel prize winning economist Richard Thaler’s favourite examples  

He presented people with a choice of being either Mr. A or Mr. B in the following scenario: 

Mr. A is waiting in line at a movie theatre.  When he gets to the ticket window he is told that as the one-hundredth-thousandth customer of the theatre, he has just won $100. 

Mr. B is waiting in line at a different theatre.  The man in front of him wins $1,000 for being the one-millionth customer of the theatre.  Mr. B wins $150.  

Have you made your choice (be honest, please!) ?
Are you now smiling? 😊

This irrational behaviour, Dr. Thaler says, is regret aversion.  At a generic level, people are willing to earn absolutely less if they can make relatively more.  We are willing to pay a price for relative rank and status, which is traded in a different form of currency – social capital. 

This is also the reason for another fascinating discovery:  
Research has shown that silver medallists feel worse, on average, than bronze medallists. (Gold medallists, obviously, feel best of all.) The effect is written all over their faces, as psychologists led by Thomas Gilovich of Cornell University found out when they collected footage of the medallists at the 1992 Olympic games in Barcelona. Gilovich's team looked at images of medal winners either at the end of events – that is, when they had just discovered their medal position – or as they collected their medals on the podium. They then asked volunteers who were ignorant of the athlete’s medal position to rate their facial expressions. Sure enough, the volunteers rated bronze medallists as consistently and significantly happier than silver medallists, both immediately after competing, and on the podium. 

The reason is to do with how bronze and silver medallists differ in the way they think events could have turned out – what psychologists call “counterfactual thinking”. In a follow-up study, the team went to the 1994 Empire State Games and interviewed athletes immediately after they had competed. Silver medallists were more likely to use phrases like "I almost…", concentrating their responses on what they missed out on.  (we are Home sapiens, after all.  Whew!). 

Bronze medallists, on the other hand, tended to contemplate the idea of missing out on a medal altogether. These differences in counterfactual thinking make silver medallists feel unlucky, in comparison to a possible world where they could have won gold, and make bronze medallists feel lucky, in comparison to a possible world where they could have returned home with nothing! 

So the research seems to add a bit of scientific meat to Hamlet's famous line "there is nothing either good or bad, but thinking makes it so", as well as revealing something about the psychology of regret. Even though we must deal with the world as it is, a vital part of life is imagining the world as it could be – thinking about a job you should have applied for (or said “no” to), or a stock that you should have bought when it was a quarter of its current price (but nobody remembers the reverse!). 

Lesson :   Phrase an offer in a negotiation in a way that does not cause regret in the other person’s mind (such as, “had you come to me last month, I would have offered you a million more"…or "you could have had the opportunity to go onsite if you had come to office last Monday when we took the decision").   

 

 

 

 

 

 

Should We Shun An Auction?

An enduring myth that people persist with is that corporations take hard-nosed, rational, unemotional decisions. 

In general, this is nonsense.  A corporation does not take a decision; the people in the corporation do and they are subject to the twists and turns of emotional upheaval.  In case you wonder if I can back this up with an example, here is one (of many, I chose this, because it is just so egregious): in 2010, telecom companies in India paid around Rs 1 lakh crore (that is, Rs 1,000,000,000,000!) for 3G spectrum and never recovered from the experience, plunging into whipping debt.  They justified their bids with extraordinary projections of business which none of the senior guys ever believed were possible. 
Why did they commit hara kiri? 

The answer has to do with emotions.  It is a story that teaches us a great deal.  It is the story of how auctions work in the human mind.  

Elizabeth Phelps of New York University and Mauricio Delgado of Rutgers Univ (of whose team Dr Phelps was a part) have studied the issue of overbidding in auctions and here is what they have found: since auctions are, in a way, competitions for something that is limited, there are two emotions that present themselves – the need to be better than someone and the fear of losing out (or ‘fomo’, as now termed).   
Which is more dominant?

But first: have you come across dopamine? 
Dopamine is a type of neurotransmitter. Your body makes it, and your nervous system uses it to send messages between nerve cells. That's why it's sometimes called a chemical messenger. Dopamine plays a role in how we feel pleasure (after receiving a reward, for instance). It's a big part of our unique human ability to think and plan.
From Webmd 

So, here is what the studies show:

Winning an auction is intrinsically socially competitive, unlike winning a lottery.  Both wins activate dopaminergic signalling (as has been found in the study).  But, now comes the catch: losing a lottery has no effect, while losing a bidding war inhibits dopamine release.  Not winning a lottery is bad luck; not winning an auction is social subordination.  Auctions, by making people feel as if they stood to lose something, tend to manipulate them into overbidding further than they normally would.
And, finally, it would be nice for us to accept that the brain is wired to take emotional decisions. A summary of these studies in National Geographic (https://www.nationalgeographic.com/science/article/why-do-people-overbid-in-auctions) says this:   

In these auctions, for example, one and only one part of the brain – the striatum – reacted very differently. When players won, brain activity in their striatum increased. Losing, on the other hand, evoked different reactions depending on the game – the striatum didn’t react when a player lost the lottery game, but activity in this area fell when they were defeated in the auction. In fact, the volunteers with the greatest penchant for overbidding showed the deepest falls in striatal activity when they lost. 

This is not the first time that the activity of the striatum has been linked to winning and losing during psychological games, and other studies have revealed that the area plays a role in decision-making and feelings of reward. 

 

 

 

 

 

 

Stuck? Indecisive on what to do next? Ask a stranger

 A hundred and twenty years ago, in 1901, Georg Simmel, an academic, wrote a seminal essay titled The Stranger.

He offered a wise piece of advice to anyone needing to take a decision: consult a stranger. The power of strangers stems from their objectivity: they do not need to please you or watch your expression (even if they did....?), are not bound by ties or by custom or precedent. They see things differently (though they have biases, of course).

And Simmel used the example of medieval cities in Italy that recruited judges from outside because no native was truly impartial.

History has proved Simmel right. Shouldn't we learn to consult a stranger and listen before we decide?

Play the Ultimatum Game

Are you a rational or an emotional person (or a mix of the two)?

Shall we play the Ultimatum Game to find out?

ps: play it in your mind, of course.  Now-a-days, the Americans have a word for it - 'Thought Experiment' - which I dislike (intensely) because it sounds like fingernails on glass

This is a simple, take-it-or-leave-it bargaining environment. Say, a stranger (call him GameOwner) brings another stranger up to you (GamePlayer) and asks you for your participation in an activity.  You agree.  GameOwner and GamePlayer do not know each other and have just been introduced.  So, all three of you are strangers to each other. 

GameOwner then takes out a bunch of ten-rupee notes and speaks to GamePlayer in front of you: "I am giving you ten ten-rupee notes - that is a hundred rupees.  You can share how many notes you wish with this person (that's you!)."

GameOwner then talks to you: "When you receive the money, if you choose to keep whatever you receive, GamePlayer keeps what is left with him.  If you reject the offer from GamePlayer, I get back the whole amount - that is, a hundred rupees - from him!  A key condition: both of you are not allowed to speak"

GameOwner then gives GamePlayer the ten-rupee notes.  And do you know what GamePlayer does?

He keeps eight of those ten notes, and gives you just two!

What do you think you will do?  Will you keep the twenty rupees or will you reject it?  

The Ultimatum Game was designed forty years ago, in 1982, and is now one of the most popular games in Behavioural Economics, having been played thousands of times all over the World.  The key result of Ultimatum Game experiments is that most proposers offer between 40% and 50% of the endowed amount, and that this split is almost always accepted by responders.  What does this tell us?

That, by and large, people are fair and you can trust them.  (Are you willing to accept this? When I first read about the results, I wondered which planet they were referring to, but, of late, I am more receptive to positive news.  )

Now for the next (and final) question: what did you do in that Game - did you accept the twenty rupees (rational behaviour) or reject it (emotional, because it is so so unfair) ?

What experiments reveal is that, when the proposal falls to 20% of the endowment (that is, a person gets two out of ten notes, say), it is rejected about half of the time, and rejection rates increase as the proposal falls to 10%.
(results quoted from Experimental Economics and Experimental Game Theory, Daniel  Houser and Kevin McCabe)

The reason we tend to reject a bad offer is because the decision to do so is taken by a part of the brain called the amygdala which is the chap within responsible for social and emotional decisions.  The amygdala triggers a desire to punish the GamePlayer for being unfair.  

Fascinatingly, people with damaged amygdalae are generous to a fault!  They will continue to trust someone and accept their bad offers.

(for more on amygdala, the brain - and about everything else - read up a brilliant book called Behave, by Robert Sapolsky)

ps: my amygdala seems normal for the moment. 

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The Devil's Deputy

 ‘He is full of pre-conceived notions and has a ready answer for the question, “Why will this not work?” or “Why should we not do this?”.  Never contributes any positive suggestion to the team and grumbles when I do not take his path.  Very irritating chap and has a damaging effect on others.  Can be sarcastic in a subtle way that I often do not understand (though I know he is being caustic and that make me angry!).’

‘Hmm. So, how did you deal with this guy?’

‘You know, he has been in the organisation for many years, so I had to tread carefully.  Have sidelined him in decision making.  I must tell you this: his command over English is excellent, much better than mine, and he flaunts it as a way of showing his superiority.  Does this often, in e-mails with stakeholders and in meetings.’

‘So, you think he is playing a game of some sort?’

‘Very much! I think – and now I am being truly honest – I think, he wanted to lead this team and was upset that I was brought in from elsewhere.  He believes – again, this is what I think – that he has superior knowledge of the domain than I do.’

‘This whole business of managing him seems to be stressing you out?’

‘Of course. I avoid meeting or speaking to him or making eye contact in meetings.  I have worked for so long that I can do this well, but it definitely stresses a person.’

How could I tell him – one who was much older than I was and senior in rank (my boss) – that he was the problem, not his deputy ?  That the game-playing, passive-aggression and sarcasm of the subordinate was the manifestation of dejection, yet his criticism (which I often heard) was analytical and incisive and that ignoring this counter-view was costing the team? 

Should I have told him that the Roman Catholic Church had a Devil’s Advocate role assigned to a person called the ‘Promoter of the Faith’, who had to make a case against the candidates that the Church was considering for sainthood – a role to be the wet blanket, the nay-sayer?  That the deputy should have been given extra prominence and attention to boost his esteem and involvement (the chap was known to be sharply intelligent)?  That the manager had to manage himself – his thoughts, emotions and biases in that order - to manage his subordinate ?

I never said any of this on that day twenty five years ago.  

Things unravelled in months.  The deputy left, but not before he had done substantial damage to his boss’ future, who was recalled to the parent organisation.  Over the next five years, under a new leader, what followed was sheer carnage as an organisation with market-leadership status found its key employees leaving and was reduced to a bit player.  Which it still is.

It all started with a Devil’s Advocate who did not have a jury to listen to him. 

(ps: much of that conv between boss and me happened in his room.  Some of it - my contribution - did not take place, but provides the continuity in the dialogue.  QED)

Haka Aggression

Are you - YOU, specifically - able to distinguish between aggression and ritualistic threats of aggression?  Between a statement or action that has aggressive intent and one that is, well, fake talk (but well faked!).  Say 'Yes, I can distinguish between these' only if the ritualistic threat does not affect you beyond the surface - it is water off a duck's back, just passes you by, that sort of thing.

And, if you still say Yes, you are in a minority (to which I only occasionally belong, because I do get affected by ritualistic threats as much as by actual aggrrresion!)

There is a lot of ritualistic aggression around us: on the road, for instance.  Or a child might tell her sibling, "if you do this, I will hammer you," though she means nothing of the sort.  At work, "if you do not get this new lead to be our client, your job is in trouble."  Coldness in language and expression is another way that the human-baboon bares his teeth.  

Look for it.  (and, when talking to yourself - which I hope you do often - make a mental mockery of the whole exercise!  Otherwise, you end up stressed. Nothing more important than to be happy.) 

There is a insightful bit on ritualistic aggression in Behave, a great (but heavy) book by Robert Sapolsky, Professor of Biology and Neurology at Stanford:

...many primates have lower rates of aggression than of ritualized threats (such as displaying their canines).  Similarly, aggression in Siamese fighting fish is mostly ritualistic.

Then there is a great contemporary version of human ritualistic aggression, namely the haka ritual performed by rugby teams from New Zealand.  Just before the game starts, the Kiwis line up midfield and perform this neo_maori war dance, complete with rhythmic stamping, menacing gestures, guttural shouting and histrionically threatening facial expressions.  It is cool to see from afar on Youtube, while up close it typically appears to scare the bejesus out of the other team.

However, some opposing teams have come up with ritualistic responses straight out of the baboon playbook - getting in the haka-ers' faces and trying to stare them down.  Other teams come out with ritualistic responses that are pure human uniqueness - ignoring the haka-ers while nonchalantly warming up; using their smartphones to film the display, thereby emasculating it to something vaguely touristy in flavour; tepidly applauding afterward with great condescension

The last response is brilliant!  Do you think you can do this the next time you are confronted by a ritualistic threat of aggression?  

 

Are performance and perception related? Here is what a fascinating (and sobering) study tells us....

 

In 2004, World Bank economists Karla Hoff and Priyanka Pandey reported the results of a remarkable experiment.  They randomly chose 321 high-caste and 321 low-caste boys in the age group of  11 to 12, from scattered rural villages in India, and set them the task of solving mazes.  

First, the boys did the puzzles without being aware of each other’s caste.  
Under this condition, the low-caste boys did just as well with the mazes as the high-caste boys, indeed slightly better.

Then, the experiment was repeated, but this time each boy was asked to confirm an announcement of his name, village, father’s and grandfather’s names, and caste.  
After this public announcement of caste, the boys did more mazes.  This time there was a large caste gap in how well they did – the performance of the low caste boys dropped significantly.

It seems to be a self-fulfilling prophecy:  when we expect to be viewed as inferior, our abilities seem to be diminished. We get further negative commentary - hardly a motivator, you will agree - and the spiral digs deeper in.

Have you heard of - or personally experienced - this?  An employee is considered an average-to-poor performer at work, gets a change of role or team or job and becomes a good-to-champion performer?  (have seen this.  Twice.  In one instance, going back twenty years, I was the average performer, so it strikes a rather sensitive chord)

The same phenomenon has been demonstrated in experiments with white and black high-school students in America, most convincingly by social psychologists Claude Steele at Stanford University and Joshua Aronson at New York University.  In one study, they administered a standardized test used for college students’ admission to graduate programs.  In one condition, the students were told that the test was a measure of ability; in a second condition, the students were told that the test was not a measure of ability. 

The white students performed equally under both conditions, but the black students performed much worse when they thought their ability was being judged.

So, what does this have to do with negotiation?  

Well, a great deal actually.  In relationship negotiations - with team members and family, for example - a perception about someone acquires reality status in everyone's heads and the person's ability to negotiate is impaired. She gives in, often permanently, allowing the other person a feeling of victory in the negotiation, but it is a shallow chimera, for there is acceptance of the decision, not ownership.   

Would I do this if I was negotiating a key decision with my child?
If not, can I do this to anyone else?   

Overconfident? Not me.

Well, it turns out that most of us are. For instance, Rod Kramer of the Stanford Business School found that 68% of the MBA students in his negotiation class predicted that their bargaining outcomes would fall in the upper 25% of the class!

When our home was being constructed, I asked the contractor - who has two decades of experience - how long it would take. Ten months, he asserted, with complete confidence, despite my reiteration of the question.

It took fifteen months, with a hopelessly rushed job at the end, for which we are still paying the price, years later .😼

 

Overconfidence is a bias that is now well studied and recognised (except in those who are overconfident!). We tend to minimise the probability of poor outcomes and emphasise the reverse, the probability of perfect or semi-perfect outcomes.

ps: The difference between belief, optimism and overconfidence is something I am learning all the time......

.Harvard Law School has four short ways - that I strongly believe in - to minimise the overconfidence bias in negotiating and decision making:

1. Collect credible information about the other side

2. Consider the opposite: why you could be wrong, or your assumptions incorrect

3. Find a devil's advocate (and make her feel comfortable about criticising your idea or plan)

4. Do not be afraid to ask (even for information that you assume the other party will not provide you).

Read the one-page note, which expands on these points, here.