Managers in highly competitive industries know the importance of making the right decisions. They also know that most of these decisions will, at some point, require the ability to negotiate effectively.

A new book by Wharton faculty entitled Wharton on Making Decisions, edited by Stephen Hoch and Howard Kunreuther, includes three chapters designed to give managers insights on negotiation and how to strengthen their bargaining skills. Specifically, the chapters examine the role of deception in negotiations, the pros and cons of using e-mail and computer programs to negotiate, and the importance of reputation in bargaining.

Assessing the Costs of Lying

If people do not often think about the role that reputation plays in negotiation, it is equally true that they often misunderstand the frequency with which deception enters the bargaining process. In a chapter titled “Deception in Negotiations,” Maurice Schweitzer, professor of operations and information management, argues that deception is widely prevalent in bargaining.

“Deception happens all the time,” Schweitzer says. “In negotiations studies, researchers have found that deception occurs anywhere from 30% to 100% of the time depending on how you measure it. For example, in one recent study I found that deception occurred 58% of the time.”

It is true, Schweitzer says, that deception can be necessary to civilized communications and sociability, as when you tell your mother-in-law that you love the multicolored alpaca sweater she gave you for your birthday. But deception in negotiations can pose real problems because one side can gain tremendous advantage by lying.

The chapter relates how Textron, during negotiations over a new labor contract in 1994, told the United Auto Workers that the company had no intention of subcontracting work to nonunion members. After the contract was signed, Textron announced that it would subcontract work to nonunion workers, and it emerged that Textron had been hatching such a plan all along. The UAW sued the company for negotiating in bad faith. But a court found in the company’s favor, saying that if the union thought the issue of subcontracting was important, it should have sought to have appropriate language written into its labor agreement.

Why do people lie and how are lies incorporated into the decision process? Some of the answers can be addressed with a cost-benefit analysis: as the benefits of deception rise and the costs fall, negotiators become more likely to lie.

But Schweitzer notes that the cost-benefit calculation is only part of the picture. For one thing, assessing the costs can be complicated. A negotiator must figure out how likely it is that the lie will be detected. If he has been successful at lying in the past, he may overestimate his ability to lie again and get away with it. In addition, a negotiator must estimate the legal and reputation costs of detected deception. If she has to negotiate repeatedly with the same people, she may find the cost of lying to be high.

It is perhaps bad enough that deception is widespread in negotiations. What may be worse is that few people are able to sniff it out in any kind of consistent way. “Deception is difficult to detect,” Schweitzer says, “and all of us are naturally poor lie detectors. On top of that, we overestimate our ability to detect deception. This is true for people we don’t know as well as those we know quite well. Your spouse can probably mislead you far better than you think.”

If deception occurs so often in negotiations, how does a negotiator guard against it? Schweitzer says people should be vigilant in identifying signs of deception by paying attention to the cues that can help detect lies on the part of their opponents. These include vocabulary cues, such as “let me be honest with you,” and verbal cues such as the use of negative statements, over-generalized statements, irrelevant information, and slips of the tongue. Other cues include hesitations in speech and a reduced rate of speech, as well as less gesticulation, less head movement, increased sweating and false smiles, which are smiles with no accompanying movement around the eyes and forehead.

During bargaining, Schweitzer says, deception can be minimized if negotiators establish a foundation of trust, avoid overconfidence, ask direct questions, listen carefully, pay attention to cues, keep records, and get things in writing. “We should be on guard against deception,” he says. “Legal remedies are not a perfect substitute for our own vigilance.”

When E-mail Negotiations Work Well and When They Don’t

As it has with so many other areas of life and commerce, information technology is changing the way people negotiate, says G. Richard Shell, professor of legal studies and management. In a chapter titled “Electronic Bargaining: The Perils of E-mail and the Promise of Computer-Assisted Negotiations,” Shell traces the impact of the Internet and associated computer technologies on how people negotiate.

“The topic of electronic negotiation is one that a lot of businesses are very concerned about,” Shell says.

The Internet permits almost instantaneous communication, which allows people to more readily form coalitions. “You can mobilize vast numbers of people in many places in rapid order,” Shell explains. “Coalitions can then be more effective in bargaining. Unions have recognized this, as have groups that have staged protests in Seattle and elsewhere against the World Trade Organization.”

Increasingly, negotiating is conducted via e-mail. “The art of being a good e-mail negotiator is more complicated than many people think,” says Shell, who has also written about negotiations in a 1999 book, Bargaining for Advantage: Negotiation Strategies for Reasonable People. “A lot of damage to relationships is being done by people who underestimate that complexity.”

Shell says most people mistakenly believe that negotiating by e-mail is the same as negotiating face-to-face. They do not realize that research has shown that conflict is more apt to arise as a result of electronic correspondence than with in-person communications. Another drawback is that groups of people take much longer to make decisions when they use e-mail than when they meet face-to-face. Also, when time is short, groups using computers tend to reach more extreme decisions than do people in face-to-face meetings.

Three problems stem from e-mail negotiations. One is isolation, which reduces interpersonal awareness and leads people to have less empathy for others. Another is informality when writing messages, which causes people to treat communication casually, encourages bluntness and can be construed as exhibiting a lack of personal concern for the other party. “A terse request can be seen as a demand,” says Shell.

A third problem with e-mail negotiations is the “narrow bandwidth” through which meaning is conveyed. Since e-mail consists entirely of text, as opposed to the combination of spoken words, tone and facial expressions used in face-to-face talks, it is difficult to ascertain the other person’s mood, motives and goals.

E-mail, however, does offer advantages to negotiators. It can encourage detachment, which can be a benefit to people who already have a rocky relationship. Using e-mail also adds built-in pauses for reflection between rounds of negotiations, ensuring opportunities for careful thought as opposed to off-the-cuff responses made in moments of heightened emotion. Moreover, e-mail can break down systems of organizational hierarchy and status, which encourages more equal participation by everyone negotiating via an electronic network.

Shell’s chapter also discusses the emergence of software support systems that help people handle complex negotiations. Software support systems exist primarily in the business-to-business space and are still in the early stages of development, Shell says. The most developed forms of software support have taken place in a few industries, such as insurance, in which companies have launched web-based dispute resolution systems where the parties do not see each other face-to-face. These are structured like auctions where there is a simple set of offers and counter-offers.

“I generally recommend electronic forms of negotiation for people involved in established relationships where there is a lot of trust and people already see each other on a regular basis,” Shell notes.

Over time, Shell predicts, negotiators will get better at using the Internet, but electronic bargaining will never completely supplant traditional give-and-take. “The Internet has something of a bad name now because of the dot-com bust, but it is here to stay and it will change the way people make decisions. Making decisions about negotiations is one area that will be affected, but bargaining by e-mail won’t be the efficiency-generating engine that some imagine it to be. The trick is to minimize the perils and maximize the benefits.”

Manipulators vs. Creampuffs

Most executives value their reputations. But few understand how both good and bad reputations can affect current and future negotiations, says Rachel Croson, professor of operations and information management and co-author, with Steven Glick, of a chapter titled “Reputations in Negotiation.” This chapter describes one of the first academic studies on the influence of reputation on negotiation.

One key finding was that negotiators have reputations and that those reputations build and spread quickly. This is especially true in “negotiating communities,” such as close-knit Silicon Valley, where the robust flow of information contributes to reputation building among entrepreneurs, venture capitalists and others on either a first- or second-hand basis.

In the study presented in this chapter, 105 Wharton students described their negotiating partners’ reputations. The research then examined negotiating outcomes as a function of those reputations. The research determined that a person’s reputation strongly affects both the negotiating outcome and the negotiating processes adopted by the party on the other side of the bargaining table. In general, negotiators are more likely to use hardball tactics against both tough counterparts and creampuffs. This may seem odd, but Croson found that confrontational tactics were more likely to be used against tough negotiators for “defensive” reasons (to hold one’s own against a tough opponent) and against cream puffs for “offensive” reasons (being aggressive from the outset can often yield quick benefits).

What is more, the research found, people are more likely to use more cooperative approaches against middle-of-the-road negotiators than with either tough negotiators or cream puffs. The reason: beginning with an extreme demand against a nice and reasonable negotiator can spoil the bargaining atmosphere.

Croson says that the main contribution of the research is to encourage negotiators to consider their reputations when they are involved in a negotiation. It is vital that negotiators manage their reputations because how others see them can have such a significant impact on negotiation outcomes. “Often, people who negotiate don’t think about how others are going to perceive them, and in particular they don’t take into account the long-term implications of their actions,” she says. “You have to be conscious of your long-term reputation. Whatever you do – whether you want to be seen as tough or more middle-of-the-road – do it keeping in mind the long-term consequences of your actions; don’t just choose negotiating tactics for short-term advantage.”