Negotiation and the Short Term Performance Trap

Economists and psychologists love intellectual puzzles like The Prisoner’s Dilemma, a game that posits a 2-person bargaining or competition situation.

In The Prisoner’s Dilemma, one person goes free if he “rats out” the other prisoner and the other prisoner stays mum. Unfortunately, if both rat out each other, they each get life in prison.  If both stay mum, they each get off with just a year.

When the game is played with strangers—one time only—the most common result is the double-rat-out.  Oops.

The challenge to economists is to explain why people so frequently do not act “rationally.”

The answer shows up when you play it ten times in a row. With a friend. With eye contact.

But—especially—from playing it ten times in a row.

Then the players quickly learn to cooperate.  (Though sometimes they’ll turn vicious again the last round.  Or maybe not. Think reality TV shows.)

The point is: it’s smart to think collaboration, cooperation, medium to long term focus.  Not a one-time, zero-sum, confrontational me-vs.-you outcome.

The learning for managers, sales managers, brokers, etc. is clear: if you think you’ll never see this customer again, nor have to deal with this customer’s spouse, friend, or cousin, and you think no one will ever hear what you’re about to do, and you’ll gladly trade a good reputation for money—then go ahead, squeeze the customer, try to win the negotiation—treat it like a transaction.

All others: operate on the assumption of multiple transactions—which, for lack of a better term, let’s call relationships.

Assume you will have repeat customers; that your reputation matters, even in terms of simple self-interest; that what goes around comes around; that six degrees of separation in today’s world is a vast overstatement, and it’ll bite you if you don’t believe it.

It’s a simple enough answer. People in social situations routinely act as if they’re a member of an ongoing social group, even if they’re not. (See for example similar results regarding The Ultimatum Game).

That, however, is in social situations.  At the business level, particularly with customers, another belief system often gets in the way.  I hear it frequently.  It sounds like this:

You don’t understand, Charlie; around here, you get measured on short-term results. So there’s a lot of pressure. You have to be a lot tougher on customers—terms, pricing. Trust is nice and all that; but I’ve got a job and a bonus structure and I’ve got to make a living. Go tell it to my boss.

OK, let’s tell it to”your boss.”

Every time you treat a customer from a transactional point of view, you are hurting your long-term profitability. And the short term has a way of turning long-term very quickly. You run out of new customers to squeeze to get all you can in one deal.  And if you rat-out your customer, and your customer rats you out in return, you just bought yourself long-term low profit prison terms.

Put another way:

The best short-term performance does not come from short-term management—it comes from medium- and long-term management done well.

Management, that is, based on the presumption of a relationship, not a series of oppositional transactions. Management based on principles, not self-interest.  If you want to be in charge of your own long-term career, don’t let “your boss” ruin it with short-term management.  Your customers will remember your behavior, not your boss’s words.

Trust makes money.  Prisoners who rat each other out lose money.

Please tell “your boss.”

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