For both individuals and business owners, negotiations can prove to be one of the most difficult and most important things that we do.  The largest purchases that most people make frequently involve very intense negotiations.  The ability to gain employment, and earn promotions is also frequently influenced by your ability to negotiate.  Negotiation has a very significant impact on personal, professional, and financial success.  Because of this, it is very important to understand the parts of negotiations that are the most important, along with the parts that are frequently misunderstood.

To many people, the idea of negotiating brings up images of aggressive arguments where both sides attempt to prevail against the other in a pitched battle for power where one side wins and the other side loses.  Another paradigm of negotiation is one where a “win-win” paradigm requires that no deal be made unless both sides realize significant benefits.  The truth of negotiation exists in-between these opposite visions.

Best Alternative To a Negotiated Agreement

The term BATNA, meaning “Best Alternative to a Negotiated Agreement” was coined by Roger Fisher and William Ury of Harvard University, and incorporates many of the ideas published by John Nash in his work on Game Theory.  The idea incorporated in BATNA is that our ability to negotiate is heavily influenced by our alternatives if the negotiated agreement does not occur.

One way to think about BATNA is to imagine that you’re looking to sell a car.  If you have one buyer lined-up who will pay $2,000 for the car, then you will be very unlikely to accept less than $2,000 from anybody else unless you have doubts about the original offer.  Your best alternative is selling the car for $2,000 and that places you in a position of power to confidently list the car for sale at a higher price. Alternatively, if you need to raise cash very quickly and have no buyers lined-up, then you may need to accept $500 or less from the first able buyer whom you come into contact with.  Thus, your best alternative exerts a tremendous degree of influence over your decisions.

How BATNA Influences Our Idea of Fairness

One of the enduring ideas of humanity is the notion of fairness.  The situations that most people perceive as being unfair are those where one side has a significantly better BATNA than the other.  An example of this is if you are walking across a desert, parched of desperate thirst, and run across a truck who offers to sell you a 20 ounce bottle of water for $5,000.  The natural response to this scenario is that the transaction is supremely unfair since the cost of that bottle to the seller is approximately one dollar.  In this situation, the BATNA of the person walking through the desert is a painful death of dehydration.  Alternatively, the BATNA of the seller is their lost time and the expense of driving across the desert to find somebody walking whom they can sell water.

The reason why this feels so unfair is because the alternative of the person walking is death, while the alternative of the person selling the water is simply wasted time.  However, this transaction still makes both parties better off, even though it feels patently unfair.  If the truck were not present to sell the high-priced water, the person walking across the desert would suffer a painful death.  Even when the person driving the truck engages in what is frequently called “price gouging,” he still delivers a valuable service that is critically important to the person in the desert.  Thus, in what seems to be a blinding paradox, some of the transactions that appear to be the most unfair to the “little guy” are actually the most beneficial.  The reason for this is because when the best alternative for the “little guy” is worse that the seemingly unfair exchange, then they are far better off with the deal that feels severely slanted against them.  Thus, by using legislative power to prevent exchanges that feel unfair, it is possible that we are actually condemning the people whom we think we are helping to suffer an even worse outcome.

How BATNA Influences our Negotiations

Another important thing to consider in regards to BATNA is its impact on our personal, career, business, and investing decisions.  Within this insight is two levels of distinction.  The first is that our alternatives influence our decisions.  The second is that our perceptions may differ from reality, and result in decisions that are sub-optimal.  In short, it is very easy to both over-estimate and under-estimate our best alternative.

• Why our Alternatives Matter

  • The simple reason why alternatives matter so much is because we can be more confident in refusing low-quality outcomes when we have a better alternative.  If you are highly educated and experienced in a field that is in demand, you do not need to take the first job offer that comes your way.  If you are able to re-locate with ease, you can be more flexible in finding a new job that allows you to advance more quickly.  If you are a business owner who already has a key customer that generates sufficient revenue to cover your costs, you can negotiate pricing with new customers from a stronger position.  If you are able to assemble investment deals that generate a high rate of return, it will allow you to walk past the traditional financial instruments that are sold for retirement planning.
  • In short, the decisions that you make are bracketed by the alternatives that you possess.  By increasing the quality of your alternatives, you increase the strength of your decisions.  Thus, the ‘real’ way that people achieve success is not just through the decisions that they make, but through developing the alternatives that allow them to make high-impact decisions in the first place.  Most of the best investments require some degree of capital.  If you are unable to pay the monthly rent, high-impact investing is not an option.  Regardless of how educated you are in decision making, those decisions will not become available until you influence the underlying alternatives through preceding actions and decisions.

• Over-Estimating the Alternatives

  • One of the thing that frequently happens in high-stakes negotiations is that one or both sides will over-estimate their alternatives.  This typically results in the adoption of “tough-guy” negotiation techniques, and can create very large problems if the deal falls apart and the assumed alternative do not materialize.  Typically this situation occurs when negotiators fail to invest sufficient research into their realistic options.  The most frequent occurrences of this effect are when one side focuses on the other side’s lack of options more than their own situation.
  • For example, the union frequently notes that management will be in a pinch without labor.  Similarly, management frequently notes that the union members will be in trouble without their wages.  The truth is that both labor and management suffer from a prolonged work stoppage.  It is important to avoid taking your eye away from your own alternatives by excessively focusing on other people’s alternatives.

• Under-Estimating the Alternatives

  • Another way that people can run into trouble is by under-estimating their alternatives.  When this happens, people will be likely to take “the first thing that comes along” instead of searching for their best option.  Typically, this situation occurs when people have a low opinion of themselves and their abilities.  This is not to say that ego and arrogance are in order, but that an honest assessment is critical.

In the end, understanding our alternatives is a critical part of optimal decision making.  It is important to make an honest assessment of what our options look like so that we can avoid the errors of both over-estimating and under-estimating the quality of our alternatives.  This is one of the fundamental keys to negotiating success in our personal, professional, and financial life.

 

Recent gyrations in the financial markets resulting from the recent downgrade of US government credit by Standard and Poors has been a roller coaster ride for investors.  Persistent decreases followed by a sharp increase, then a decrease, and another increase has investors wondering what to expect next.  The financial markets have become a roller coaster of volatility.  And this roller coaster is not only constrained to stocks.  The debt downgrade created a paradoxical result of stoking new fears for widespread default in the euro-zone, and actually channeled more capital toward US treasuries, which pushed down yields.

In addition to this, the housing market is still extremely soft, with very few buyers able to qualify for financing, and very few sellers able to price their property at the market rate, due to being under water on their loans.  In addition to this, there is still a persistent hangover of foreclosure inventory that is dragging on the resale of properties.  This has created a strange dichotomy in many markets where new construction or default/foreclosure properties are the only inventory that sells.  This creates another roller coaster for people attempting to move resale property since the intensity of competition results in lowball offers and excessive demands from buyers that would have been completely unheard of in the past.

What this all comes down to is the fundamental truth that the future is intrinsically uncertain.  During the stock market bubble of the late 1990′s and the real estate bubble of the early 21st century, people came to expect continued rapid escalation of their investment assets.  The resultant collapse of these bubbles left many people in dire financial condition.  This problem was amplified even more so with the most recent bubble, due to the high number of people who had purchase property with high rates of leverage.  This meant that when the values compressed, the owner suddenly found themselves ‘upside down’ with more in debt than the market value of their property.

Now that we are in the middle of sorting out the mess from the real estate bubble, people are wondering what to do.  This problem is further complicated by the fact that our current economic difficulties are being addressed with many of the same policies that created the last bubble.  This has led many to speculate that a new bubble of some sort is in the process of forming.  With all of these swirling factors to consider, many investors are befuddled and confused.  Most people just want to earn a reasonable rate of return so that they can retire in relative comfort.  However, this task is proving to be much more difficult than financial planners make it out to be.

Opportunistic Investing

In a market environment that is highly volatile, the best results typically come from being opportunistic.  This means acquiring investment assets when confidence is low and buyers are distressed.  For stock market investors, this means finding companies that are fundamentally strong, and pay good dividends, then targeting them for purchase when market values dip.  In this way, investors purchase a stream of future dividend cash flows for a rock bottom price.  This strategy can also be employed for growth based companies as well, but it relies exclusively on future value appreciation, which is more volatile, but can also deliver greater total returns.

For property investors, market dips are the best time to acquire income producing real estate assets.  This is especially true since the high rates of default and foreclosure are driving many people who used to be homeowners into the renter pool.  Over time, this will become a boon for income property investors, as the overall increase in the renter population strengthens rents.  It means that investors must deal with the inevitable difficulties that accompany tenants and rental properties.  However, many investors are finding that the risk of tenants is preferable to the roller coaster volatility of financial markets.

Dynamic Course Adjustments

Another key characteristic of success in the current market environment is the ability to change course as the financial landscape evolves.  The strategies that worked best in the past may not be optimal in the future.  The investments that work the best now may not work the best in 20 years.  Astute investors must do more than “follow a system” … they must “create a strategy.”  The strategy should be what informs your decisions.  The strategy should be bigger than a single investment category, and it should encompass more than simply making money.

The purpose of a strategy starts with what you are attempting to achieve with all of your income producing activities.  It could be retirement, it could be a lifestyle, it could be paying for your children to attend college.  Whatever the goal is, it is very important to understand that part of your strategy first.  The second most important characteristic is your risk tolerance.  By and large, the more volatility and hassles you are willing to deal with, the higher rates of return you will be able to achieve.  However, these rates of return will not come in a smooth, even stream.  In order to achieve the “Big Kid” rates of return, you will need to move beyond packaged investments like mutual funds.

Once your end-state goal and risk tolerance has been defined, then it is time to decide what category of investment and specific opportunities are right for you.  The answer to this will most certainly be different for everybody.  Thus, it is less important to find the “best” opportunity, and far more critical to find the “right ” opportunity.  The way that you will be the most successful in business and in life is to pursue the opportunities that are right for your personality, temperance, and life situation.

 

One of the common themes in success authors such as Napoleon Hill is the notion that people are frequently more successful when engaged in a line of work that they enjoy.  To these people, their work is much more than something they do in exchange for a paycheck.  It rises to a form of artistic expression or occupational poetry.  This phenomenon is extremely important, as artists frequently go to extraordinary lengths to ensure that their works are exceptional.  Similarly, businesspeople who view their work as a form of art will go to great amounts of effort to ensure that they are delivering the best value to their customers.

Most people familiar with the open source WordPress software suite have seen the phrase “Code is Poetry” on the site homepage.  Software programmers have a long history of viewing their work as a form of art.  To an astute programmer, the greatest achievements come from writing critical operations that can be done very simply and elegantly, without creating a large mess of complicated code that burdens the processing power of the computers operating it.  In this way, art is created by means of an efficient program that accomplishes its goals with a minimal amount of overhead.

For people seeking to lift the prospects of their business or their career, they would be well advised to elevate their work up from an occupation to the status of artistic expression or poetry.  Taking pride in the quality and output of your work is one of the most notable features for prominent artists.  This means that giving your best and being the most creative is done not just to earn income, but because you have a burning desire to be the best that you are capable of.

The supreme power of this burning desire is that it helps us to unlock our inner genius.  Most people have within them the seeds of greatness in some occupation or calling.  The trick is finding those seeds and cultivating them to fruition.  The first step on the path to accomplishing this goal is the realization that nobody else will cultivate those seeds for you.  The creative genius that lies dormant within your mind can only be discovered and used by you.  This is a journey that each person must take for themselves. People can help you, guide you, and advise you, but nobody can take this trek of discovery on your behalf.

Because of this, many people go throughout their entire lives without ever discovering their inner genius.  Life becomes a drudgery of working and watching the clock to see when quitting time is going to come.   The elevation of your work to a form of art is an integral part of unlocking the creative abilities of your mind.  It is only by becoming aware of the opportunities around you that your full genius can be brought to bear.  For the people who learn to master this art, the world becomes an eternal oyster of endless opportunity.  The only question that remains to be answered is whether you are willing to invest the effort to discover the genius that lives inside of you.

 

In the world of real estate investment, there is a term known as ‘highest and best use’ to describe the best possible use for a building or area of land.  When making decisions, many investors will stop to consider the highest and best use for the land that they are considering to purchase.  Would it be better to add another rental unit?  Would it be advantageous to add a garage or storage area?  It may be that the best use for a building is to tear it down and start over.  On the other hand, it may be that the current use of a property is the best use.

This same kind of analysis should be done for our personal decisions and the use of our time.  Every time you are doing something, ask yourself if it is the highest and best use of your time at that particular moment.  When you are undertaking a project, is it the best use of your efforts and energy?  The purpose of this analysis is to systematically replace the activities that do not represent the best use of your time with new ones that allow you to be more effective in accomplishing your goals.

When conducting this introspection and analysis, it is very important to keep your ‘true’ goals and objectives in perspective.  It can be easy to obsess on business or career goals, and forget personal and family priorities that are even more important to your long term well-being.  An example of this is taking time to play with your children.  As you replace more and more activities with the highest and best use for your time, you will find yourself moving closer and closer to your goals.

As time goes by, it is likely that your perceptions concerning the highest and best use of your time will change.  The important part is to be constantly thinking about your personal, professional, and financial priorities.  This thought process should guide the decisions you make concerning how to spend your time.  As you slowly change the priorities that guide each of your decisions, you will notice yourself moving closer and closer to your goals.  The movement is not necessarily the result of a grand strategy, but by consistent decisions that each bring you a little bit closer to your goals.

 

As we go throughout life, each of us will work with a wide variety of professionals.  Their specialties can span across many disciplines ranging from financial and legal to medical and psychological.  In many of these cases, the people we work with possess special skills and knowledge that are critically important to our personal and financial wellbeing.  Because of this, it is very important to ensure that you are working with the best when you establish professional relationships.

The irony of working with the best is that it is frequently no more expensive than working with somebody who is less skilled.  For example, when conducting real estate transactions, the buying realtor commission is frequently paid by the seller, which typically runs somewhere between 5% and 6% of the purchase price for the home.  The important part to note is that it will cost the same amount of money to work with an outstanding realtor as it will to work with a shoddy one.  Thus, it makes quite a bit of sense to seek out a professional who is highly skilled.

When it comes to other types of specialties such as tax accountants or legal professionals, there is much more variation in the rates that are charged for services.  Every April, there are frequently banner signs advertising “Rock Bottom Prices” for tax preparation.  What few people stop to consider is whether the person preparing their taxes will be finding ways to reduce your tax burden to the legal minimum, or simply burn through your 1040 so that they can get to the next name on the list.  In most cases, the gains you will realize from working with skilled professional will exceed the additional cost many times over.  These gains can come in the form of lower taxes, finding better real estate deals, protecting your family from legal risks, or experiencing better health and wellbeing.

It is important to note that not all people charging premium prices are highly skilled.  Paying a premium for lowly skilled people is an exercise in foolishness that is best avoided.  However, for those who actively seek out the best professionals there are tremendous gains to be realized for yourself, your family, and future generations.  After all, you’re going to be working with people anyway . . . so you might as well work with the best.