New Approaches to Procurement Negotiation – Attitudes Towards Risk

Our last BravoSolution Real World Sourcing event looked at the latest thinking in behavioural psychology and how it might impact negotiation strategy, approaches and ideas. We looked in particular at the work of Dr Daniel Kahneman, who won the Nobel Prize for Economics, despite being a psychologist, not an Economist!

He won the prize for showing that humans do not behave rationally in an economic sense when we make decisions. That blew big holes in many economic models and theories, which assumed consumers always behaved logically. No they don’t, said Kahneman and his collaborators in the field of behavioural psychology, they behave very illogically at times!

The session went down very well, so we have turned some of that material into a new briefing paper, titled “New Approaches to Procurement Negotiation – Dr Daniel Kahneman and Behavioural Psychology Suggest Some Winning Techniques”. You can download it here, free on registration.

In our paper, we look at a brief background to Kahneman’s work and his ideas on System 1 and System 2 thinking, then we get into three concepts that are areas of interest to negotiators – Priming, Anchoring and Risk. We’ll be featuring a few excerpts here in the days to come, and we’ll start today with some of that background. But please do download the whole paper.

Attitudes towards Risk

The work Kahneman did in the area of risk was central to his winning the Nobel Prize. He showed how most people have illogical attitudes to risk, certainly looked at on a rational, mathematical basis, and how this can lead to what appear to be poor economic, personal or business decisions. This has implications not only for supply chain risk management (obviously) but also for negotiation.

Here are three key Kahneman findings in this area:

1. People overestimate the probability of unlikely events and overweight them in their decisions. In procurement and supply management terms, we should take risks seriously, but there is a danger that we spend too much time, effort or money looking at the very low probability, but serious, events. Then the distraction of looking at the low probability event results in not enough focus on some events that are more likely to put us at risk--even if less potentially impactful. That applies both in terms of negotiation, as well as during contract delivery ...

2. Most people are risk averse and will turn down what is logically a good risk (gamble) to protect what they have already got. We feel regret very strongly. We dislike giving up what we already have and make illogical decisions based on that. Losing something makes us feel worse than never having it in the first place! The “endowment effect” -- the premise that people assign more value to things just because they own them -- is one of the most fascinating of the behavioural psychology discoveries ...

3. Humans will accept risk that they logically shouldn't in terms of trading a sure loss for a low probability gamble of an ever greater loss. ("If I've lost £1000 already, I’ll gamble – I won’t feel much worse if it is £1500"). This is what we might call the "throwing good money after bad" syndrome in business terms ...

In all of these three risk cases, simply understanding how these traits tend to work is a big part of the battle. Even sharing the knowledge with the other party can make a lot of sense; if both parties understand the endowment effect, there is likely to be less frustration when agreement seems harder to reach than it should.

Download the paper to find out more about these three examples of attitude to risk and how they can impact on our negotiation experience.


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