Negotiating with a Crazy Person

by F.

Another thought occurred to me last night as I was comparing negotiating experiences with my wife; it’s sort of an addendum to yesterday’s post and concerns negotiating with a crazy person.

In addition to the “my boss won’t let me” negotiating tactic, another common one is to place a crazy person in a position of power. I’m not sure how many times this is real, but it seems (to us) common and definitely works in many circumstances.

Here’s an example. One of the last deals I did was moderately significant—the amount of money changing hands was about $2 million. Our opponent was a smallish company with tremendous market power in one product area, and that product was what we wanted to buy. Essentially, we had no alternative but to deal with them, though we signaled relentlessly that we had other alternatives, including manufacturing a substitute product ourselves (a bluff). It was never clear whether they knew how backed into a corner we were. Given that we got a favorable deal, I think we fooled them. But who knows.

So we negotiated and negotiated and negotiated for months over various terms, of which price was the easiest (it usually is, in my experience). As we got closer and closer to a deal, our opponents started to mention their CEO, “Charlie,” a lot. “Oh, Charlie may not go for that” and “I’ll have to see what Charlie says.” In other words, this was their out (like I mentioned yesterday). They could negotiate credibly, but with a caveat that Charlie could come in and scuttle the deal. As I mentioned yesterday, this was typical in my experience, so it’s not like we were super surprised. In fact, we had our own “Charlie” character, so we started doing the same thing.

Finally, as we got down to two or three open issues, we had a call with Charlie and he was a complete asshole, as is typical in my experience with execs. He was yelling and posturing and threatening all kinds of things. In fact, he appeared completely nuts. What he said didn’t make much sense, and I even think he contradicted himself a few times. He threatened to blow up the deal, which we had worked months on. It was classic brinkmanship, the paradigm example of which seems still to be the Cuban Missile Crisis.

In brinkmanship, one or both sides signal to the other a credible threat, but they do so by letting the situation get slightly out of control. Why? Because if they didn’t let the situation get out of control, the threat would not be credible. Consider the Cuban Missile Crisis. The threat was nuclear war. No sane person wants this. Hence, each side signals that it is slightly “crazy.” Kennedy did this by pointing to his military folks and saying, essentially, “Nikita, these guys are nuts—I don’t know what they’re going to do once the blockade starts.” (For more on this, see Chapter 8 of Nalebuff and Dixit.) And it worked.

In my negotiation, Charlie was the joker in the pack who threatened to take us over the brink into “no-deal” land. He played his role well. And I think he did the right thing. But why?

First, the drones actually negotiating the agreement will be subject to all sorts of biases, such as loss aversion. So, they’ve spent 9 months (or whatever) and hundreds of hours negotiating this agreement. They want to close. It’s only human. And since this is a sale, the salesman on the negotiating team wants a commission. He mostly cares about price. He cares somewhat less that there are other, unfavorable terms in the deal (such as warranties or indemnities). So the interests of the negotiators are not aligned perfectly with those of the company. Economists call this an “agency cost.”

Given this agency cost (read: disconnect between the incentives of the boss and the worker) Charlie was right to look at the deal afresh and think, “Is this a good deal for my company?” He had to credibly signal to us that he would do this, and that if the deal looked stinky, he would blow it up, no matter how much time his underlings had spent negotiating it. This is the right thing to do.

How did his craziness fit in? It made his threat of blowing up the deal credible. If he had acted totally rationally, we would have been more likely to be able to predict his action, and that could have made his threat less credible. For instance, if we knew it was rational for him to take the deal, and we knew he was rational, then we would have seen his, “I’m doing to torpedo this deal!” fulminations as bluffs. Of course, there are many ways to be unpredictable. But acting crazy or irrationally is easy and can’t be misinterpreted by the other side. Subtlety is nice is some things (very few, actually), but not here. You want to send clear signals.

We had our own crazy person, a VP named “Ed,” who was a complete dick. He was smart and everything, but he was unpredictable and very similar to Charlie. So we each had our joker in the pack, but we didn’t bring them out too early. Had we done that, the threat of “no deal” would have made us less likely to negotiate in earnest. So, stick a crazy person somewhere in your negotiation, but don’t play them too early.