Why do so many of the people we enthusiastically hire turn out to be disappointing on the job? Why do the complex projects we negotiate often end up with frustrating delays and cost overruns? More generally, why do our negotiations often fail to pan out as we’d hoped?
Answers to these and many other negotiation-related questions can be found in the work of Nobel-prize-winning psychologist Daniel Kahneman, who died at age 90 on March 27. With his longtime research collaborator, Amos Tversky (who died in 1996), Princeton professor Kahneman identified many systematic errors in human cognition that hold us back in negotiation and decision making. This understanding can help us diagnose our mistakes and strive to overcome them.
In his modern classic, Thinking, Fast and Slow, Kahneman offered a thorough introduction to the many ways in which our intuition fails us. During a 2021 PON Live! event, he noted that job interviews are a common place where faulty impressions skew our judgments and decisions. “In an unstructured interview, the interviewer forms an impression of the candidate in the first two or three minutes and spends the rest of the interview justifying that impression, which is not very useful,” Kahneman said.
Fascinated by Our Flaws
Kahneman, a Lithuanian Jew who survived World War II in France, became interested in human psychology at a young age. While serving in the Israeli military, he was part of a unit responsible for choosing candidates for officer training. Often, the candidates didn’t pan out. “We were just not very good at predicting what actually would happen to them if they went to officer training school,” Kahneman said during the PON Live! event. He was fascinated by this failure, which he dubbed the “illusion of validity.” It was the first of many systematic and predictable cognitive biases Kahneman went on to identify in human decision making.
In the 1970s, Kahneman and Tversky formed an extraordinarily close and productive partnership that applied their findings on psychology—specifically, the fact that our decisions are biased in predicable ways—to economic theory.
“Kahneman and Tversky created a scientific revolution by showing that the assumption in economics that people behave rationally was wrong and that the systematic ways in which it was wrong could be explained by psychology,” says Harvard Business School professor Max Bazerman. In the process, the duo created the far-reaching field of behavioral economics, as well as related fields, including behavioral marketing and behavioral finance. “This explains how someone who never took a course in economics ended up winning the Nobel Prize in economics,” Bazerman says.
A Counterintuitive Finding
During the PON Live! event, Kahneman was asked which of the cognitive biases in negotiation that he and Tversky identified affected him most personally. Kahneman singled out non-regressive prediction, or the common tendency to underestimate the degree to which people’s performance regresses to the mean—that is, averages out over time.
Imagine Julie, a graduating university senior who learned to write fluently at age four. When asked to estimate Julie’s GPA, most people assume it is very high, based on her early reading ability. In fact, given the tendency for behavior to regress to the mean, Julie’s GPA is much more likely to be about average, or perhaps just a bit higher because of her precocity, according to Kahneman. “The amount of information that you get from the statement of how early she read is really not enough to support a prediction,” he explained.
In the context of negotiation, non-regressive prediction could lead us to predict that a job candidate who won a major career award the previous year will continue to perform at the highest levels. In fact, a candidate’s performance is likely to fluctuate from year to year, Kahneman and Tversky’s research shows.
Failing to adequately account for regression to the mean can lead us to be disappointed in others’ performance and our own. It can also prompt the erroneous conclusion that punishing people for poor performance will help them do better and that rewarding exceptional achievements will keep accomplishments at a high level. More commonly, a great achievement will be followed by a mediocre year, and vice versa.
Framing Effects and Beyond
Notably, Kahneman and Tversky also determined that whether risky decisions are framed as positive or negative changes our risk preferences. Specifically, due to loss aversion, we feel losses more strongly than equivalent gains. “For most people, the fear of losing $100 is more intense than the hope of gaining $150,” they wrote.
Because we are biased by framing in negotiation, we are susceptible to being manipulated into making decisions that go against our best interests. Kahneman and Tversky’s work on framing created interactions between the fields of psychology and economics, and prompted the development of behavioral economics, notes Bazerman.
What findings from Daniel Kahneman and Amos Tversky’s research have you found useful in your negotiations?