How Short-Term Focus Contributes to Future Disasters in Business Negotiations

By on / Business Negotiations

How Short-Term Focus Contributes to Future Disasters in Business Negotiations

Negotiators tend to concentrate too closely on the here and now. By incorporating future concerns into your talks, you’ll make sounder decisions and guard against crises.

In the midst of the U.S. financial crisis, accusations of greed on Wall Street sounded across the globe. Greed may be a significant factor in the collapse of credit markets, but it’s not the only one.

Overlooked in cries to punish the “bad apples” is the role of a mistake that virtually all negotiators make: ignoring how our short-term decisions will affect us and others in the future. In their book Predictable Surprises: The Disasters You Should Have Seen Coming and How to Prevent Them (Harvard Business School Press, 2004), Max H. Bazerman and Michael D. Watkins describe the financial scandals of 2001 and 2002 that led to the fall of Enron, Arthur Andersen, Tyco, and other companies. They label such crises “predictable surprises”—disasters that shock those involved even though they had the information needed to anticipate them.


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.


The Enron-era crisis, Bazerman and Watkins argue, was rooted in a flawed U.S. accounting system that makes accountants financially dependent on clients they’re supposed to audit in an unbiased manner—a conflict of interest that could cause auditors to make compromised judgments. Looking at today’s credit crisis, an unprecedented demand for affordable mortgages prompted banks, unhindered by significant regulations, to make risky lending decisions and equally risky investments.

Defaults and foreclosures by overextended homeowners led to a credit crunch that brought down financial institutions and triggered a $700 billion taxpayer-funded Wall Street bailout package.The details and effects of these two crises are different, but they share at least one common thread: the desire to maximize short-term returns blinded decision makers to predictable surprises lurking down the road. In both cases, warning signs went unheeded. Here we explain why this error is so common and suggest how you might inject more forward thinking into your negotiations.

Why We Fail to Look Ahead

In 2006, the rate of mortgage defaults began to rise in the United States as subprime borrowers (those who were unqualified for traditional loans) had trouble keeping up with mortgage payments.

Choosing to ignore these early signs of danger, banks and other lenders continued to grant and invest in high-risk mortgages. Executives at investment bank Lehman Brothers, which invested heavily in mortgage-backed securities, were warned in January 2008 that the company was facing liquidity problems.Yet the firm proceeded with capital outlays, including $5 billion in bonuses, from 2007 until the firm went bankrupt in September 2008, the New York Times Reported. Many smart people, it seems, failed to adequately prepare for the possibility that the housing bubble might one day burst. Why? Three cognitive biases can keep us from anticipating predictable surprises, according to Bazerman and Watkins:

1. We discount the future.

To avoid a predictable surprise, we must often make compromises and investments in the present. We need to contribute to our 401(k) plans now to ensure a comfortable retirement.

To slow down global warming, we need to conserve energy now. Unfortunately, such tradeoffs between the present and the future are often unappealing, so we avoid them. The widespread tendency to discount the future causes us to ignore looming problems, such as the current credit crisis. It also causes organizations to underinvest in long-term initiatives, such as customer loyalty and research and development, that could have big financial payoffs.

Taking the long view in negotiation can be especially difficult when others, including future generations, are more likely than we are to suffer from problems that could arise from our actions. From multinational negotiations about global warming to governmental spending decisions that deepen budget deficits, immediate concerns often rule the day.

2. We hold positive illusions.

The very human tendency to view ourselves and the future more positively than reality can sustain enables us to persist at difficult tasks and protects our self-esteem.It can also cause us to think we have more control over the future than we actually do, to believe that a problem doesn’t exist or warrant action,and to avoid responsibility for our mistakes. For example, many governments and their citizens ignored scientists’ warnings about
global warming for years, choosing to believe the problem would not become serious.

3. We are egocentric.

People tend to perceive the same situation in very different ways depending on their role. You may sincerely wish to reach a negotiated agreement that’s fair to all parties involved, but your interpretation of what’s fair is likely to be biased by what is best for you. During the housing boom, for instance, some lenders and mortgage brokers may have justified the profits they reaped from adjustable rate mortgages (ARMs) and loans to unqualified borrowers by congratulating themselves for enabling more Americans to become homeowners.But when ARMs exploded and credit dried up, many of these buyers went into foreclosure and found themselves worse off than before.

Adapted from “How Short-Term Focus Contributes to Future Disasters,” first published in the December 2008 issue of the Negotiation newsletter.


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 Posts

Comments

Leave a Reply