Receive tens of millions of dollars in a mediated settlement, and you might rightly think you scored a victory.
But if Tyler and Cameron Winklevoss felt triumphant after a negotiation that led to a $65 million win from Facebook back in 2008, they quickly came down with a case of “settler’s remorse” and tried to undo the deal. The twins’ story is a textbook case of not knowing when to walk away from a dispute.
Back in 2003, while students at Harvard University, the Winklevosses and another Harvard student, Divya Narendra, enlisted classmate Mark Zuckerberg to do computer programming for a website they created called Harvard Connection (later known as ConnectU). The Winklevosses claim that Zuckerberg put them off repeatedly, only to release his own social-networking site, originally called “TheFacebook.”
After the Winklevoss team sued Facebook—and Facebook countersued – the two sides engaged in a mediation in February 2008. They reached a settlement that, for tax reasons, was structured as an acquisition of ConnectU by Facebook. The twins were paid $20 million in cash and $45 million in Facebook stock valued at $35.90 per share.
Soon after, however, the Winklevoss team challenged the two-page settlement on the grounds that it was not binding and that, by failing to disclose a lower valuation of the company (which was publicly available) that might have won them more shares, Facebook had cheated them out of hundreds of millions of dollars. (Facebook shares have since soared, increasing the settlement’s value substantially.)
The ConnectU team, claiming they were motivated not by money but by a desire for fairness, asked a federal appeals court in San Francisco to undo the deal. (The twins also sued the lawyers who had helped them with the settlement; a judge ruled in favor of the lawyers.)
In an analysis of the case, Steven M. Davidoff of the New York Times found the Winklevosses’ two arguments to be weak, given that the agreement stated its terms were binding and that federal securities law does not require sellers to disclose all the material information they possess.
Indeed, this past April, the appeals court upheld the settlement, calling it “quite favorable.” Seemingly undaunted, the twins began preparing to appeal their case to the U.S. Supreme Court. In June, however, they announced that they had changed their minds and were giving up the fight.
The Dangers of Escalation in Negotiation
The Winklevosses’ dissatisfaction with a hefty settlement may seem like an extreme case of greedy negotiators not knowing when to move on from a settled dispute. Yet according to Davidoff, it is not unusual for litigants to try to withdraw from settlements after a mediation ends. In fact, virtually all negotiators are susceptible to irrationally escalating their commitment to a chosen course of action, according to Harvard Business School professor Max H. Bazerman.
Labor strikes, custody battles, and price wars are just a few of the types of intractable disputes that often can be traced back to this form of dysfunctional competition. When you view a challenging negotiation as a competition, it can be very difficult to know when to accept an outcome as final. Here are some of the most common traps that spring from this bias and advice on how to avoid them.
1. Fixating on fairness.
The Winklevoss twins justified their appeal of the mediated settlement as a quest for a fairer outcome. They apparently felt a strong desire to punish Facebook for failing to disclose a valuation that might have won them a higher settlement.
Fairness concerns, which are often paramount for negotiators, can overshadow objective outcomes in our minds. But, as Bazerman has noted, fairness judgments tend to be heavily influenced by our preferred outcome. When two partners are dividing up a business, the partner who invested more money will probably believe she deserves a larger share of the pie—and so will the partner who invested more time. Consciously or not, we determine our preferences and then justify them on the basis of fairness.
This egocentrism is a key contributor to destructive competition.
Solution: Whenever you find yourself protesting that another negotiator’s offer just isn’t fair, stop to consider his point of view more thoroughly. Thinking about a counterpart’s perspective can go a long way toward helping you adjust your expectations. In addition, ask respected friends or coworkers for their take on the matter.
If the Winklevosses had sought (or listened to) objective opinions on the merits of their case, they might have dropped it sooner.
2. Focusing on sunk costs.
Accounting and economics professors caution us to ignore “sunk costs” when making important decisions. The time, money, and effort we’ve invested in a negotiation are irrelevant to any future investments we might be considering.
This advice can be tough to follow, according to Bazerman. Your condo’s assessed value may have plummeted since the housing crisis hit, but the amount you have already spent on it will loom large when you are trying to decide on an asking price. Focusing on how much you’ve invested in the place over the years is likely to cause you to set an unrealistically high price.
Solution: Remind yourself—over and over, if necessary—that the time, money, and energy you’ve spent on a negotiation should have little bearing on your current decisions.
Impartial experts can help guide you toward a more dispassionate view of your options.
3. Let go psychologically.
The longer a dispute drags on, the more susceptible disputants are to demonizing each other. The desire to punish the other side becomes an unhealthy fixation, and every communication is met with suspicion. The passion you invest in a dispute can become a sunk cost in its own right.
After fighting Mark Zuckerberg for years, the Winklevosses may have had difficulty letting go psychologically of the desire to punish him for his perceived wrongdoings. Moreover, their apparent distrust of Zuckerberg led them to second-guess a financial settlement that observers judged to be quite generous.
Solution: In negotiation, as in other spheres of life, it can be difficult to recognize when the pursuit of a goal becomes a destructive obsession. Here again, discussions with trusted counselors can help you recognize when it’s time to let go.
Have you ever dealt with difficult people in negotiation? Tell us your story in the comments below.
Adapted from “When Should You Give Up the Fight?,” first published in the October 2011 issue of Negotiation.