Tweet

Deal or no Deal: The All or Nothing Mentality in Negotiations

Guest post by: Jennifer Loftus

Article Overview: Risk aversion is one of the main factors that may be holding people back from both finding that million dollar case AND finding that million dollar job. A look at how the most captivating game show in recent years is very relevant for negotiations in the business world.

Deal or no Deal: The All or Nothing Mentality in Negotiations

There have been a lot of famous game show questions over the years. “Would you like to spin the wheel or solve the puzzle?” “What would you bid on this dining room set?” “Is that your final answer?”

One question has been capturing the American public lately, a question which has implications beyond the game show and its host, Howie Mandel. That question, which is also the namesake of the show, is “Deal or No Deal.” Human Resource professionals should take the implications of what goes on in the game into account when they negotiate with their prospective and current employees.

Thierry Post, Martijn van den Assem, Guido Baltussen, and Richard Thaler studied the effects of “Deal or No Deal” in the television show and in the classroom. According to their findings: “Contrary to the traditional view of expected utility theory, the choices can be explained in large part by previous outcomes experienced during the game. Risk aversion decreases after earlier expectations have been shattered by unfavorable outcomes or surpassed by favorable outcomes. Our results point to reference-dependent choice theories such as prospect theory, and suggest that path-dependence is relevant, even when the choice problems are simple and well-defined and large real monetary amounts are at stake.”

This all sounds great, but what does it mean in plain English? And for which choice does Human Resources need to watch out?

“Most notably, risk aversion generally decreases after prior expectations have been shattered by eliminating high-value briefcases or after earlier expectations have been surpassed by opening low-value briefcases.”

This means that someone who would be risk averse will become more risk-seeking if their expectations are under or over the actual results. In a business negotiation sense, this would mean that an offer perceived as a “lowball,” or on the other hand, an offer way above the candidate’s expectations, will actually make the person more risk-seeking. If this holds true, then a candidate who values themselves at $40,000 a year and gets an offer of $20,000 will feel that they can negotiate in a risky manner and maybe lose the job before they’ll accept the lowball offer. Similarly, the same person who receives a $60,000 offer will try to turn this good fortune into an even higher salary, either with his or her current company or by leveraging that offer into a higher bid from another firm. If the study is correct, the person who is easiest to negotiate with is the one with expectations closest to the $40,000 offer.

After describing “Deal or No Deal” as an economist’s dream – because the game involves no skill at all and therefore does not differ due to skill level – Mr. Post described people’s actions in more detail for the Wall Street Journal: “That supports ‘prospect theory.’ Prospect theory holds that people evaluate prospects for gains and losses from psychological reference points that may shift over time (like an early setback) instead of seeking to maximize the ‘utility’ they receive from money under a rigid formula.”

In practice this probably makes sense. A person who gets an offer around what they think they are worth is much more likely to accept it, or at least will be less risky in their negotiating, knowing that you have aptly priced them in the market.

NPR radio explained last year that this happens because of people’s aversion to risk in general. When offered $50 or a coin flip at $100 or $0, they will take the guaranteed $50 or even $45, when their expected return in the original offer is the same in both instances.

The University of Pittsburgh Medical Center took the NPR study one step further and found that the part of the brain that looks for immediate rewards – as in taking lower offers – may be the part of the brain that is linked with addiction: “The preference for immediate over delayed rewards of larger value, which researchers term ‘delay discounting,’ has already been linked to impulse-control problems, such as substance abuse, addiction and pathological gambling.” While it may be considered quite rash to expect that someone who is negotiating for a signing bonus and a smaller overall salary is going to become a drug addict, this study does delve into the fact that looking at people’s habits in a “Deal or No Deal” situation can help determine certain aspects of their personality.

So how does a Human Resource professional act upon this? “Not all positions are suitable for risky behavior. On the other hand, some positions require the element of daring,” explains Jennifer Loftus, National Director of Astron Solutions. “Human Resource professionals must thoroughly understand the positions for which they’re hiring to ensure sourcing of the best suited candidate.” One way to effectively source could be by asking a simple expected returns question to an interviewee. If it’s a position where you are looking for someone who will shoot for the top, then look for the person who takes the coin flip at $100. If this is going to be a person, let’s say, giving out loans at a bank, you may want to find the person who will take the $50, because they may be more prone to avoiding risks. Even a simple task such as letting the candidate play a round of “Deal or No Deal” and watching their behavior can tell you a lot about their tolerance for risk. Because when it comes down to risk preference at work, you want to know what your future employee is going to answer when they’re asked “Deal or No Deal?”

Related Articles
  3 Tips to Empower Your Negotiations
  Winning At Negotiations
  Powerful Negotiation Tips From Your Strategic Thinking Business Coach
  A Closed Mouth Never Gets Fed
  3.0 Global Development Challenges for Africa in 2006: Economic Report on Africa 2007

Article Tags: assem, business negotiation, choice problems, deal or no deal, dependent choice, dining room set, favorable outcomes, final answer, game risk, howie mandel, human resource professionals, martijn van, monetary amounts, path dependence, prospect theory, richard thaler, risk aversion, thierry post, unfavorable outcomes, utility theory



Related Forum Posts
Who inspired you to start? - When I was a teenager I read "The Art of the Deal" by Donald Trump while on a road trip to New York City. It helped inspire me to want to start my own business and is also one of the reasons why I have created so many famous entrepreneur profiles. I believe that by modeling the success of other entrepreneurs you too can become successful. Who was it that inspired you to start your business?
Trump and Stewart - I really enjoyed Trump: The Art of the Deal and The Martha Rules. I think the best advice you can get is from people who have made it and not just consultants who haven't been there. Evan's site is great because of all the famous entrepreneurs and their advice directly from them. Donald Trump and Martha Stewart are 2 great examples of successful entrepreneurs and the books are written in their own words which I find extremely valuable and motivational.
Re: Obama Wants Social Security for Illegals - [quote="Alan Mater":2puakyzo][quote="Lucy Wu":2puakyzo]I think America's biggest problem right now is clearly the recession, and that should be the main focus as of now.[/quote:2puakyzo] I agree. Do you think President Elect Obama is doing or will do what is best in terms of beating this recession?[/quote:2puakyzo] Unfortunately, I think Obama is going to pull another "Roosevelt." According to economists, Roosevelt's plans for the New Deal extended the Depression by 7 yeasrs... We can already see today that nothing has "changed." Incompetent bankers, lenders, and businessmen get into trouble, the politicains vote to give them billions of dollars of *our* money to bail them out...and yet there is no oversight of how the politicians are going to spend that money! They can do anything they want with it including bailing out the auto companies. Frankly, I sure do wish I worked for Chrysler right now. They've shut down all their plants... and yet every worker will continue to be paid their full salary...for sitting around the house doing absolutely nothing. (I wonder if they'll get Christmas Eve and Christmas Day triple time pay, too.)
Re: Obama Wants Social Security for Illegals - [quote:21pbp7ux]Unfortunately, I think Obama is going to pull another "Roosevelt." According to economists, Roosevelt's plans for the New Deal extended the Depression by 7 yeasrs... We can already see today that nothing has "changed." Incompetent bankers, lenders, and businessmen get into trouble, the politicains vote to give them billions of dollars of *our* money to bail them out...and yet there is no oversight of how the politicians are going to spend that money! They can do anything they want with it including bailing out the auto companies. Frankly, I sure do wish I worked for Chrysler right now. They've shut down all their plants... and yet every worker will continue to be paid their full salary...for sitting around the house doing absolutely nothing. (I wonder if they'll get Christmas Eve and Christmas Day triple time pay, too.)[/quote:21pbp7ux] This is what happens when the Government gets involved and puts its nose where it shouldn't. Let the market correct itself. There is no reason for the Government to bail everyone out. If the businesses, mainly banks, weren't corrupted with greed, this wouldn't have happened. They are and it did, so let them dwindle away and pay for their mistakes. That's what any small business has to do. Why should they be any different. They have gotten away with it for over 10 years! Surely they should have seen this coming. [quote:21pbp7ux]Sad but this is exactly how I feel about it. Change is coming - but unless I'm really wrong, it is not a change this country needs. Amazing how much a good speaker with a good speech writer can do. If you paid attention to the things he said "off script" - much of it is frightening. Chris[/quote:21pbp7ux] It IS sad. What's more sad is the fact that Obama had the media wrapped around his finger, and still does. The media is just as corrupt as the banks.
Different Types of Funding - Finance for business can be obtained through a number of different sources. Let's review some of those channels to help you decide what's right for your business needs: Grants There are over 930 different EU and UK grants and loans available from over 100 issuing bodies. This is the cheapest form of finance and an important part of the funding package that companies and individuals need. We can help you find your way through this maze. Technology Micro Projects: 50% of eligible costs up to £20,000 Research project: For a technical and feasibility study of an innovative idea for new technology 60% of costs up to a grant of £75,000. Development project: For development up to pre production 35% of costs up to a grant of £200,000 Developing an innovative idea: valuable for small companies and individuals at the start of a technical project: 75% of costs of hiring a mentor and consultants. Export To start exporting or moving into new markets grants of 50% of costs up to £20,000 each. Training and Education Knowledge Transfer Partnerships, Achieving Best Practice in Your Business, Investors in People Modern Apprenticeships New Deal for various grants. Environment BOC Foundation for the Environment: 25% to 50% of Project cost, typically £20,000 to £100,000 Clean up Fund: Emission reducing equipment up to 75% of cost Community Chest Fund: Up to £25,000 for projects near active SITA sites High Impact Fund: £150,000+ for larger projects near SITA sites Assisted Areas Regional assistance grants of between 10 and 35% for capital expenditure in less favoured areas of the UK. Loans Loans are an excellent source of finance if you have suitable security to borrow against or a reliable earnings stream. This needs to be planned and presented well to obtain funds. Credit cards Provides up to 56 days free credit if you play the game! Overdraft Banks are surprisingly supportive when presented with a well thought through plan and competent management. Bank Loans Lenders tend to look for a good business plan and security. Typically the loan is approved by a centralised back office function rather than the person you meet. Terms and rates depend upon the risk. Repayments can be very flexible to meet your specific needs. Mortgages These can include flexible repayment terms to meet your business needs. This can even be incorporated into your overdraft finance so that you have one flexible account for both personal/ business mortgages and overdraft Small Firms Loan Guarantee Scheme Up to two years trading: Up to £100,000 Over two years trading: Up to £250,000 However these are difficult to obtain and are a loan of last resort. Export Guarantee Scheme This is government backed insurance against appropriate export documentation. Mezzanine This is a halfway house between loan and equity. It can be an innovative way of raising funds for the more established business. Mostly for expansion capital. Equity This is not as easy as the papers would have you know. Only 1% of business plans received by Venture Capital Funds are successful. However, a good business proposition consisting of a strong demand for the product or service, management track record and a sound financial plan will enhance the chance of success. Business Angels These are high net worth individuals who are successful businessmen looking for investment opportunities. They can provide both time expertise and money. Typical investment size is £25,000 to £250,000 but can go as high as £2m for the right opportunity. Exit within 3-5 years. Venture Capital These are investment funds seeking high rates of return. However typically investments are over a million pounds. Some funds are targeted at lower amounts depending upon the sector and region. These funds are looking for exponential capital growth over 3-5 years. Asset backed finance This can cover machinery, sales invoices even sales orders. It can be a very flexible source of finance to the growing business Leasing This will cover your capital expenditure and spread the cost over a three to five year period. It is particularly useful if you do not have taxable profits to maximise your capital allowances. Sale and leaseback of a property you own is another good source of funds. Factoring Factoring offers a sales ledger administration and debt collection service. Up to 95% of an approved sales invoice is paid within 48 hours, quicker if required. Credit protection is also available to protect against a bad debt. The Factor will own and place a first charge over the book debts and they might also take other charges, depending upon the strength of the financial information. Invoice discounting Invoice Discounting can be Confidential or Disclosed; it depends upon the strength of the financial information. The service is the same as Factoring, except that the sales ledger administration and the debt collection is the responsibility of the client and not the Factor. Pre payment of the approved sales invoice is still up to 95% and the factor will still have a first charge on the book debt and therefore own the debt. This service can also have credit protection cover. All sales invoices need to be for a business to business debt, and some proof of delivery is generally required. Trade Finance This is funding provided against stock purchases, signed contracts and orders whereby the funder will prepay a certain percentage of the value Pension fund It may be possible to use your pension funds for a loan back to the business What do u think about it?


Share this article with your friends. Fund someone's dream.

Leave a comment below or share on the left and you'll help support entrepreneurs in Africa through our partnership with Kiva. Over $50,000 raised and counting - Please keep sharing! Learn more.

Tweet

Newsletter

Get advice & tips from famous business
owners, new articles by entrepreneur
experts, my latest website updates, &
special sneak peaks at what's to come!

Name:
Email:

Popular Articles

What is Discretionary Cash Flow

Is the iPad useful? One CEO tells all ....

Improve E-mail: Avoid the Quicksand

Suggestions

Email us your ideas on how to make our
website more valuable! Thank you Sharon
from Toronto Salsa Lessons / Classes for
your suggestions to make the newsletter
look like the website and profile younger
entrepreneurs like Jennifer Lopez.