Except for seasoned veterans, most people tend to feel intimidated by the negotiation table. The prospect of a mutually profitable agreement often seems impossible to achieve among the sea of less-effective compromises and obligations. But it doesn’t have to be this way; the key to unlocking the secret of negotiation is hidden inside of each of us, in the everyday mundane procedures we take for granted. This is the power of Utility.
What Is Utility
Behavioral scientists use the concept of Utility to describe how an asset is valued. Put simply, utility is the ultimate exchange rate for a good, determining how valuable it is relative to other goods. This relativity is key to understanding how our internal system of values is used in negotiation. Assets do not have a universal, abstract value. In fact the inverse is true: the price of a good is determined by how it stacks up versus other, similar goods that can serve the same function. Through this conversion, we see that every economic exchange involves a form of negotiation (at least internally).
Utility In Practice
Every exchange you have can be broken down into a form of negotiation, in which the internal utility-value you place on a good is compared to the external utility proposed by another trying to change your evaluation. Let’s see some examples of this process in action.
At the store, you think to yourself “I’m willing to pay such-and-such a price for cereal, and no more”. This value is determined by context: What have you paid for cereal in the past? What is the cost of gas and time driving to a different grocer for cheaper food? All this is automatically factored into your price. Fair enough, this is your internal utility evaluation for a box of cereal. But the box of cereal has its own utility-value it proposes, and through advertising the seller is negotiating with you how this particular box is actually worth a higher price. Look at all these mineral supplements added, the segment of the box that says “15% MORE FREE!”. Surely these add-ons mean the premium pricing is justified? In this way the box is advocating that you re-evaluate your opinion about what this cereal box should cost based on new information.
But what about regular person-to-person interactions where no cash changes hands? It turns out these, too, can be analyzed using utility. Let’s say you are going on vacation and you ask your friend if she can watch after your dog while you’re gone. Internally, your unconscious is selecting her for this request due to a variety of reasons to ensure you don’t waste time asking the wrong people. Which of your friends likes dogs? Which have enough time and space to accommodate dog care? How close are you as friends? And your friend is making similar unconscious utility evaluations. How much do I enjoy dogs? Will refusing affect our friendship negatively? Do I have the time/money? Through these internal value judgements, a request includes a negotiation process in the very act of requesting. It compares the utility of acceptance/refusal on your part to what you think the other party values, and vice versa.
Everything Is Negotiable
These processes of negotiation permeate every exchange, every decision we make in relation to the world and other people. What does that mean in practice? It means that everyone is a negotiation professional, but not necessarily a negotiation expert. There is no fundamental difference between people whose job is negotiation and everyone else, as we all do these utility evaluations for ourselves every day. The difference between experts and laypeople isn’t that we negotiate, but how. The key factor is understanding how others calculate value, and using that knowledge to make appealing proposals. Deep knowledge of context makes true the classic adage “everyone has a price”, as you can determine what others’ presuppositions are and make an offer just over the value of their alternative options. Negotiation training can provide professional insight to improve this skill, and soon Machine Learning will synthesize expert analysis in economics and psychology to optimize this process. This is the future for negotiators, in pulling back the curtain covering the implicit utility evaluations within each of us and providing the best balance of our mutual needs and desires.
IntelleXt is an AI startup that is revolutionizing the way contracts are negotiated, accelerating time to close, and improving deal terms. IntelleXt’s Intelligent Negotiation Platform™ eliminates the complexities of contract redlines and stakeholder collaboration and optimizes deal terms by applying machine learning during the negotiation process.
Behavioral Researcher with formal training in psychology, philosophy, and user experience. Passionate about modeling behavioral and decision-making processes in pragmatic, actionable ways. BA in Psychology, San Jose State University