Incentive

by Mr. Cheap


It’s not terribly enlightening to assert that the threat of punishment or the promise of reward goes a long way to explaining people’s actions.  Similarly, it’s probably a pretty simplistic view of negotiation to say that it is understanding their perspective, then structuring incentives for other person to do what you want.  I’m not a very strong negotiator, but this forms the core (and almost the whole) of how I try to reach agreements with people:  I try to see the deal from their perspective, then suggest the deal be structured in a way that appeals to BOTH our self-interests.  The silly example from win-win deals of two women fighting over an orange can be viewed as an example of this.  They both had an incentive to possess the orange, but ultimately had rewards that were independent of each other (one to use the rind, the other to use the fruit).  The negotiation can be resolved by structuring the deal in terms that align with the incentive of the other party, i.e. “I only want the rind to bake with, if I give you all the meat to make juice, can I have the whole rind?”

What’s shocking is how often people ignore the incentive of the opposite party when negotiating (then can’t understand when the deal falls through).  Contractors who start a job then disappear for weeks or months on end are an example of this.  The home owner who wanted the work done clearly gave the contractor too much money up front (such that its not worth doing the job to get the balance).  The threat of a lawsuit to get their money back isn’t enough of a threat to get prompt work from the contractor.  Home-owners will gripe and moan about unethical, disreputable contractors, but ultimately I think the home-owner himself screwed up when he structured the deal.  When I had work done on my condo, I paid the painter after the work was done (through Sears) and I paid for the materials for the flooring then the labour once the work was done.  For everyone involved, our interests were aligned in getting the job done as soon as possible (for me to get tenants into the unit and for them to get paid).

I’ve seen people begging in negotiations where they’ll be telling some hard luck story why the person should give them a deal.  Maybe this works sometimes, but I can’t imagine it’s very effective.  Who cares why the person needs a good deal?  (remember, I am pretty hard hearted, so maybe this works on other people, just not on Mr. Cheap).  I saw people trying this in developing countries (“I love this knick knack but I don’t have enough money to pay for it and go on the swim with the dolphins trip.  Would you please, please, please accept less?”), and the vendors had no problem shaking their heads saying “no, sorry, full price”.  My technique was to offer what I was willing to pay, and when they said no I replied “thanks anyway, have a good day” and started to walk away.  Potentially losing the sale was a very good incentive for them to quickly reach an acceptable price.  Of course, I had to actually be prepared to leave, if I’d come back 10 minutes later, you can be sure I’d be paying full price.

One time when I was doing contract programming a gentleman was delighted that I could do the work he needed done, and told me he’d been looking for someone for months without any luck (I was shocked that anyone in business would put themselves into such a weak bargaining position).  I offered a fair price, based on my foolish perspective on pricing to which he responded with a series of e-mails commenting on “he’d find the money SOMEHOW” and “I can pay you instead of feeding my kids for a couple of weeks”.  I guess this was suppose to make me feel sorry for him and drop my price, but instead I got annoyed and worried that he wouldn’t pay his bill after I did the work (and I dropped him instead of taking the job).

Offering potential follow-up work, paying promptly, and being pleasant to work with are all excellent incentives to make a contractor give your work higher priority than other things on his plate.

One landlord I rented from showed me a place mid month and I said I’d take it from the 1st of the month.  After he asked me if I wanted to move in immediately (and I told him I didn’t as I had a place I was living) he said it was mine on the first, unless someone came by to take it sooner.  This clearly would be a great situation from his perspective.  He has an incentive to start collecting rent as soon as possible, so having a guaranteed tenant to start on the first, and the option to take someone sooner, is an ideal situation.  From my perspective, I had an incentive to line up an accommodation for the next month, and I wasn’t particularly keen to have to start looking for a place a couple days before the end of the month when he let me know that someone had taken it sooner.  I thanked him and told him I’d have to rent from someone who could guarantee me the place at the start of the month.  I told him to give me a call at the end of the month if he hadn’t found someone, and if I hadn’t rented elsewhere I’d take his place  (at which point, he figured having me was better than a chance at someone else and said the place was mine on the first if I wanted it).  Immediately, seeing things from his perspective, I realized the threat of having me rent from someone else (and him losing the tenant in front of him for a potential tenant who may or may not show up) was the way to get the deal done.  Having the option to rent to someone else was a foolish thing for him to even try to get, since considering it for even a second from my perspective there’s no way any tenant would have agreed to it (and it slightly soured our relationship from the start).

From psychology the theory of mind deals with developmental stage where people start to understand that other’s have a different mental representation of the world than themselves.  Unless someone is a child (below 3 or 4 years old) or suffers from a developmental disorder (such as autism spectrum disorder) there’s no excuse why they can’t understand other people’s perspective on a conflict and structure a deal that appeals to the other side.  This doesn’t guarantee agreement (or even a good deal), but ignoring this is a recipe for prolonged conflict.

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