Are You an Overconfident Negotiator?

By — on / Business Negotiations

The Story of J.P. Morgan and Andrew Carnegie

In 1901, J.P. Morgan wanted to buy the Carnegie Steel Company from its founder, Andrew Carnegie.

Carnegie was 65 years old and considering retirement. As Harold C. Livesay recounts in his book Andrew Carnegie and the Rise of Big Business (Little, Brown, 1975), when Carnegie finally decided he was ready to sell, he jotted down his estimate of his company’s worth in pencil: $480 million. Carnegie had the sheet of paper delivered to Morgan, who took one look and said, “I accept this price.”

When Morgan arrived at Carnegie’s offices to finish the deal, he congratulated Carnegie on becoming the richest man in the world.

“I wonder if I could have gotten $100 million more,” Carnegie reportedly mused aloud. “I probably should have asked for that.”

“If you had, you would have gotten it,” Morgan needled him.

Overconfidence and the Peril of Lost Value in Negotiation

How did a deal maker as shrewd and successful as Andrew Carnegie casually give away so much value in the biggest deal of his life?

Did his many prior successes lead him to put too much trust in his abilities and intuition regarding the company’s value and what Morgan would be willing to pay for it?

As the story of Morgan and Carnegie shows, overconfidence can have massive and costly consequences.

Unfortunately, an excess of confidence isn’t unique to captains of industry.

Common Cognitive Bias

Overconfidence is a common cognitive bias that can affect negotiators’ judgments in surprising ways.

To avoid these pitfalls, you need a clear understanding of how overconfidence is likely to affect your judgments and decisions (and those of your counterparts) at the bargaining table. Fortunately, new research suggests exactly when to expect overconfidence and offers insight into how you can prevent it from getting you into trouble in your next negotiation.

The Importance of Reservation Price

Many negotiators understand the importance of estimating the other side’s reservation price. However, despite the fact that such estimates are based on hints, clues, and speculation, negotiators are frequently overconfident that their estimates are accurate.

Say, for instance, that you do a bit of research before making an offer on your dream car. You conclude that the dealer’s invoice price (what he paid the manufacturer) is $32,500. You also assume that this is his reservation price in his negotiation with you.

Not so fast!

Your estimate could be way off base for a variety of reasons.

  • Your sources may not be impeccable.
  • You may not know about rebates the dealer receives from the manufacturer
  • You might also lack key information about consumer demand for the car.

Research on overconfidence shows that negotiators’ estimates – whether of a counterpart’s reservation price or some other quantity – typically are overly precise.

This tendency towards over-precision, or excessive confidence in the accuracy of one’s own judgment, makes it unlikely that you will sufficiently account for the uncertainty inherent in your estimates of various quantities. Even worse, once you’re seated at the negotiating table, there’s a good chance you won’t pay enough attention to useful information that you could use to update your estimates.

Discover step-by-step techniques for avoiding common business negotiation pitfalls when you download a copy of the FREE special report, Business Negotiation Strategies: How to Negotiate Better Business Deals, from the Program on Negotiation at Harvard Law School.

Related Article: How to Curb Overconfidence

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