We think: $20 for three minutes equals $400 an hour.
Awesome! Off we go to get the coffee.
Then, we find out that running the errand allowed the other person to make $1,000,000.
We “go from being ecstatic for making $400 an hour to being angry because we got ripped off,” Chris writes.
The actual “value” of the $20 remains the same. But our perspective changes.
“Just by how I position the $20, I can make you happy or disgusted by it,” Chris notes.
2: Yesterday, we looked at how Robin Williams went from being happy about cutting his fee to $75,000 for Aladdin to make his children happy to going “ballistic” when the movie became an unexpected box office smash.
The lesson we must learn?
“While our decisions may be largely irrational,” Chris writes, “that doesn’t mean there aren’t consistent patterns, principles, and rules behind how we act.”
Once we are aware of and understand these mental patterns, we can influence them.
3: “By far the best theory for describing the principles of our irrational decisions is something called Prospect Theory,” he writes.
“Created in 1979 by the psychologists Daniel Kahneman and Amos Tversky, prospect theory describes how people choose between options that involve risk,” Chris notes.
There are two key ingredients of the theory:
First, the Certainty Effect: We are drawn to sure things over probabilities. Even when the probability is a better choice.
Second, Loss Aversion: We will take greater risks to avoid losses than to achieve gains.
Assume we are given a 95% chance of receiving $10,000 or a 100% chance of getting $9,499.
We will usually avoid the risk and take the lower amount.
Yet, when we are told we have a 95% chance of losing $10,000 or a 100% chance of losing $9,499, we likely choose the opposite. We prefer to risk losing the larger amount to avoid the loss.
“The chance for loss incites more risk than the possibility of an equal gain,” Chris observes.
So, what are the implications for us of Prospect Theory in a negotiation?
Answer: We are wise to talk about what the other party has to lose if the deal doesn’t happen.
Reflection: Think back on a recent negotiation. Analyze how I felt about losing something versus gaining something.
Action: Journal my reflection.