In his book Beat the Deal, author Ed Thorp says the main job is to assess the probability of drawing a favourable hand.

Thorp shows you how to count cards so you can work out when the probability of holding a winning hand moves in your favour.

When the odds favour the player, the best strategy is to increase the bet so you can increase your payout.

Thorp calculates that a favourable opportunity comes up just 9.8% of the time. The odds favour the house the other 90.2% of the time.

The lesson for deal makers is that long term success depends on discipline and expertise. Professional gamblers have played lots of games, they stick to a specific game such as blackjack that increases their zone of competence - then they play the odds.

Professional gamblers only bet big when the odds favour them. In the Casino you have to bet every time you play. In deal making you don’t have to play, until the odds favour you.

“How could this be?” asked Gigerenzer. Eight accidents in ninety-four launches does convert into 99.6% certainty.

The guide replied Daimler Benz didn’t consider human failure in the calculation. The security calculation was based on the design features of the individual rocket parts.

This story echoes the probabilities that were banded around when the Space Shuttle exploded in 2003.

NASA engineers estimates the rate of failure for the shuttle at 145 (0.7%). Yet the program suffered two total write-offs in its first 113 launches. The Daimler-Benz and NASA calculations call into question how we relate uncertainty and risk to probability.

Michael J. Mauboussin, in a truly remarkable book, More than You Know (Columbia University Press, 2006) tells us we need to make the distinction between risk and uncertainty.

Risk is the probability of suffering harm or loss.

Uncertain is the condition of being uncertain; doubt.

Mouboussin argues “investing is fundamentally an exercise in probabilities” going on to say that “every day investors have to translate investment opportunities into probabilities”.

Successful negotiators have to do the same - except they have to translate deal opportunities into probabilities.

Founded by Israeli negotiator and author, Daniel Weiser, Negotiators International offers business and government clients access to an international network of top dealmakers based in Israel, the USA, Germany, Canada, China, Germany, Japan, Korea - and now in New Zealand!

Mills on Marketing - How to create, keep and grow crown jewel customers that generate double digit growth

But the question is; Does success come primarily from understanding the other side’s viewpoint? Or does it come from establishing deep emotional engagement?

In other words, does it pay to get into your opponent’s head or does it pay to get inside their heart?

The May 3 Economist shows research by Adan Galinsky of Kellogg School of Management at Northwestern University has revealed “that it pays to get inside your opponents’ heads rather than hearts”.

First, the researchers defined the two different approaches negotiators used to understand opponents:

1. Perspective-taking

2. Empathy

Negotiators often use these terms interchangeably but they are different.

Perspective taking is the cognitive power to perceive the world from someone else’s viewpoint.

Empathy is the power to connect with others emotionally - to feel the world from their viewpoint.

The simulations using 150 MBA students showed:

1. That the groups who focused on the perspective of the other side were much more likely to strike a better deal - 76% closed their deal.

2. The empathisers, that is those who focused on the other sides feelings were far less successful -only 54% closed their deal.

3. The control group, who simply focused on the own role without regard to the other sides’ perspective or feelings were even less successful - just 39% closed their deal.

Not surprisingly, negotiations when both sides make an effort to understand the perspective of the other side yield the highest joint gains.

But, even with just one negotiator having perspective taking abilities, the odds of a better deal for both sides are good.

In essence, this breakthrough research shows that deal making is about satisfying your opponent’s interests while meeting your own needs. Too much empathy can stand in the way of truly creative deals.

The 5 P’s, “Prior Preparation Prevents Poor Performance” reminds dealmakers that poor deal preparation can prove disastrous.

In July, 1985 Kirk Kerkorian, the head of MGM and United Artists called Ted Turner, the owner of Turner Broadcasting Services with an offer to sell him MGM/UA. Kerkorian told Turner he was going to put MGM/UA up for auction in two weeks, but Turner could have the company if he paid $1.5 billion - and closed the deal by August 8.

Turner desperately wanted MGM/UA films to give him control of his programming, so he sent 40 lawyers and accountants to go over the books. Then, two days before the deadline, and without any negotiation on the price, Turner signed a purchase agreement.

Analysts say he overpaid by $200 to $300 million.

Plus, he ignored that MGM was in a bad state producing a raft of poor money losing films. To boot, his lawyers failed to ask what legal commitments MGM had made. Turner did not uncover that on August 4, MGM/UA had signed a contract locking up all cable rights and that HBO had already contracted to buy several MGM movies at low prices.

Turner may have been a visionary entrepreneur but he proved an amateur dealmaker.

Poor preparation causes us to make unwise assumptions, since assumptions are the mother of all stuff-ups.

When you’re desperate to do a deal and under time pressure remember the 5P’s: Poor Preparation Prevents Poor Performance.

A Bitter Divorce
In 1997 Gary Wendt, the chief executive of GE Capital, divorced his fifty-four-year-old wife of thirty-two years, Lorna Wendt. Gary’s net worth was about $100 million. Lorna wanted a 50-50 split. In court, Gary argued that since it was his talents that accumulated virtually all of the wealth he was entitled to the bulk of the assets. The judge awarded Lorna $20 million. Divorce law in Connecticut calls for equitable not equal distribution of assets.

Principles of Fairness
Our notions of fairness are guided by three, often conflicting principles:

1. The principle of equality says that regardless of contribution, everyone is entitled to an equal share.
2. The principle of equity prescribes that rewards should be based on each person’s contribution.
3. The principle of need prescribes that benefits should be based on need.

Tips and Tactics

• When slicing up the cake, always ask to whom will the recipient(s) compare themselves. People often care more about how their slice compares to others than they do about the absolute size of the pie.

• Make sure the process is seen to be fair and equitable. Commitment to a deal increases when the process is viewed as just and transparent.

• Aim for simplicity, clarity, and justifiability. Perceptions of fairness increase when agreements are simple to follow, deliver clear outcomes and can be easily explained.

• Remember, our egos clash with our notions of fairness. People pay themselves far more than they are willing to pay others for the same job.

Here are the eleven most damaging mistakes negotiators commonly make.

THE ELEVEN DUMBEST MISTAKES

Dumb Mistake One: Overconfidence, Ego and Hubris
Negotiators are persistently, and irrationally overconfident. Research shows dealmakers consistently overrate their talents, knowledge and skills.

When overconfidence combines with arrogance or excessive pride the result is hubris.

The best and most persuasive evidence of overconfidence and hubris comes from the world of corporate mergers and acquisitions. Empire building CEO’s have created what is now a 3 trillion dollar a year deal making orgy. Yet study after study - carried out over the last 30 years - shows two out of three mergers and takeovers fail. Instead of creating wealth for the buyer they destroy it. A prime reason: An overconfident buyer paid too much for the acquisition in the first place.

Buyers often try to cover up their mistakes with slick PR and creative accounting. The bravest option is to admit your mistakes and cut your losses.

In 1994 Quaker Oats purchased Snapple for $1.7 billion. Analysts at the time said the purchase price was as much as $1 billion too much. But the CEO confidently pushed ahead. “Snapple has tremendous growth potential through increased penetration, broader distribution and international expansion,” he said.

Twenty-eight months later Quaker off loaded Snapple to Triac for $300 million, that is, for less than twenty percent of its original purchase price. The price of overconfidence: $1.4 billion.

Dumb Mistake Two: Loss Aversion
When it comes to taking losses on the chin, dealmakers have a remarkably low pain threshold. Psychologically the pain that we experience from a loss of a dollar is twice as painful as the pleasure that we get from making a dollar.

As a result we are quick to abandon promising deals. Or at the opposite extreme, we hold onto losing investments much longer than we should. And having made a bad deal we continue to try and salvage the deal by sinking more money into it - throwing good money after bad.

Dumb Mistake Three: Plunging In
We often dive into deals without taking the time to systematically think through the reasons for it.

Psychologically, we often decide what we want to do before we have thought through the reasons for doing it in the first place. The result is we fall into what psychologists call the confirming evidence trap. We look for evidence that supports or confirms what we want to do while ignoring information that contradicts it.

Dumb Mistake Four: Anchoring
Because we like to have benchmarks to guide us through a deal we often fall into the trap of using misleading information to influence our decisions. Most homebuyers, for example, judge their success by the amount they can negotiate off the list price. The list price in effect becomes an anchor or reference point, which the buyer uses as a reference point. A smart negotiator would ignore the list price and instead commission an independent valuation to calculate what the house really is worth.

The trouble is most anchors work on us unconsciously. How much would you pay for an engagement ring? Most people reply “two months salary”. That’s the anchor or benchmark De Beers have been not so subtly promoting to us for years in endless ‘Diamonds are Forever’ advertisements.

Think about it for a moment, two months salary. It is an absurd figure. Shouldn’t the price of a ring should be based on what you can afford?

Dumb Mistake Five: Myopic Focus
Too often we become so self-centered, so myopically focused on our own needs, we ignore the motives and needs of the other side.

Negotiators often forget the whole purpose of negotiation is to trade what is cheap for you for what is valuable for the other side. To do this you have to have an intimate understanding of what motivates the other side.

Myopia creates misunderstanding and differences where they shouldn’t exist.

And because - myopia is essentially caused by shortsightedness - it causes dealmakers to focus on the one shot deal. Myopic dealmakers rarely see a deal as the first in a series of deals, which would have long-term benefit for both parties.

Dumb Mistake Six: Frame Blindness
New York Yankees legend Yogi Berra was once asked how many slices he wanted his pizza cut into. Berra’s reply: “You better make it four; I’m not hungry enough to eat eight.”

An optimist looks at a glass of water and views it as half full. The pessimist looks at the same glass and views it as half empty. In the same way, the way we view or frame information has a powerful effect on the way we negotiate.

Research shows negatively framed negotiators give away fewer concessions and deadlock more often than positively framed negotiators.

Dumb Mistake Seven: Focusing on Vivid Events
When Jaws – the film starring a man-eating shark – opened at cinemas across the USA, the number of swimmers visiting Californian beaches dropped dramatically. Sharks do inhabit the Californian coast but the risk of a swimmer actually being attacked by a shark is very much less than the risk of being killed in a road accident while driving there.

Negotiators are often not influenced by the true facts of a situation. More often they are influenced by what makes the most vivid impression on their mind. Vivid information causes negotiators to misinterpret and distort evidence and end up making stupid decisions.

Dumb Mistake Eight: Number Dumbness
The Spanish love their lotteries. Virtually every Spaniard takes a ticket in the weekly National Lottery. The Christmas draw is so large, television broadcasts the event live. To prove to everyone the process is pure luck, children from a Madrid orphanage draw the winning numbers.

The winners become instant celebrities. One grand prizewinner was asked, “How did you do it? How did you know which ticket to buy?” He answered “For seven nights in a row, I dreamed of number seven, since seven times seven is forty eight…”.

The winner clearly can’t multiply. He doesn’t even understand he is claiming credit for an event that was determined by random chance, something that was totally out of his control.

Most negotiators rate their mathematics ability better than our lottery winner. But the fact remains, innumeracy (ignorance of mathematics) afflicts most negotiators. Typically negotiators miscalculate probabilities and fail to appreciate the impact of inflation on deals. The also fall into the trap of ignoring the small numbers in deals, the cost of which can add up to a small fortune over time.

Dumb Mistake Nine: Irrational Commitment
Knowing when to quit or when to walk away form a deal separates the smart from the dumb dealmaker. Comedian W.C. Fields said it all. “If at first you don’t succeed, try, try and try again. Then quit. No use being a damn fool about it.”

Yet too often negotiators ignore Fields advice. Committed to a course of action they become emotionally entrapped. The history of investment fiascos provides dozens of examples. Investors buy stock when they think it is a bargain, and when it collapses they buy more of the same stock, since now it is an even better deal. The commitment and the dollars invested escalate out of control.

What started out as a rational investment decision has turned into desperate folly. “Fanaticism, says George Santayana, consists in redoubling your effort when you have forgotten your original aim.”

Dumb Mistake Ten: Win – Lose Mindset
Few people are more competitive in business than the late Steve Ross, the founder of Warner Communications and later CEO of Time Warner Inc. On one plane trip aboard his corporate jet (with his wife and another couple), he was playing canasta. They were coming into land when he lost the last game. So he commanded the pilot to circle the airport until he could win a hand.

Hyper-competitive personalities like Ross often fall into the trap of treating negotiation as a contest. They can’t bear to lose – or even share the spoils of a deal with another party. They win – you lose.

The trouble is win – lose negotiators come to the deal table with the belief they are fighting for a slice of a fixed pie. Since they believe the size of the pie is fixed, negotiations become a battle over who gets the biggest slice.

Even when the other side offer generous concessions the super-competitive personality automatically devalue the concessions – since they believe what is good for the other side has to be bad for them. Win – lose negotiators also often reduce negotiations to one issue, often money. As a result potentially good deals degenerate into acrimony.

Dumb Mistake Eleven: The Lemming Effect
Lemmings are dumb creatures because when one panic driven lemming charges over a cliff, other lemmings follow the first lemming dumbly and blindly to their death.

In the same way dealmakers will pay higher and higher prices for property, paintings and companies simply because other people, for the most part whom they have never met are willing to pay similar prices.

Wall Street calls this “investing with the herd.” Financial advisers take advantage of you by preaching another Wall Street aphorism cliché. “The trend is your friend.” Translated this says, “don’t think” – follow the herd. Smart dealmakers should know better.

Overcoming Irrational Thinking
How do you overcome or prevent these potentially catastrophic mistakes?

Most of the psychological mistakes we make in negotiation are made when our minds are locked unthinkingly on automatic pilot.

To move your brain from dumb mindless thinking, to smart conscious decision-making, negotiators have to recognize the thinking traps they fall into. This requires intensive simulation-based training where negotiators are exposed to all the common pitfalls.

Once negotiators can recognize the cognitive patterns that cause their mistakes, they can then be trained how to avoid the mistake. Plus, they can be taught to exploit the thinking mistakes opponents make.

“This above all, — to thine own self be true. And it must follow, as the night the day, Thou canst not then be false to any man.”

In one insightful quote, Shakespeare tells us what it is to be real — to be authentic. Shakespeare tells us there are two tests for authenticity

1. You have to be true to yourself
2. You must be what you say to others

Journalist Edward Murrow offered the same advice:

“To be persuasive we must be believable, to be believable we must be credible, to be credible, we must be truthful.”

When you lose your credibility everyone discounts what you say. The challenge is however, that lying in negotiation is widespread. One recent study found 28% of negotiators lied about a common interest during negotiations. Another study revealed that 100% of negotiators either failed to reveal a problem or actively lied about it during negotiations if they were not directly asked about the issue.

Omission or Commission

Lies of omission (not revealing information) are more common than lies of commission (actively misrepresenting information). Wharton researcher Maurice Schweitzer found negotiators lie about:

• Reservation prices. Virtually everyone lies when it comes to stating their bottomline or reservation price.
• Interests. Negotiators often mislead their counterparts over their real interests. For example, a negotiator may portray a common interest as a conflicting interest in order to win a concession.
• Intentions. Negotiators often try to bluff the other side by misrepresenting their intentions.
• Material facts. Intentional false statement about material facts can constitute fraud.

“Harry, you’ve written books on negotiation, sales, marketing and presentation. If you had to boil all the advice into one quick phrase what would it be?”

“KFC”, I replied.

“What do you mean KFC? I didn’t ask for nutrition advice.”

I explained, “KFC. The K stands for Know what you want. The F stands for Find out what you’re getting. The C stands for Change what you do until you get what you want.”

All great persuaders, sellers, negotiators, and marketers practice KFC. They know that knowing what you want is the first critical step in persuasion. The second step is to pay attention to the feedback. Feedback is not called the breakfast of champions for nothing.

If what you tried isn’t working you change what you are doing until you get what you set out to get in the first place.

So remember - KFC:

Know what you want

Find out what you’re getting

Change what you’re doing