Negotiation for Lawyers 101: Prospect Theory and Framing

Different people holding up a frame to represent Prospect Theory in Negotiations. How you frame information in negotiations can greatly affect outcomes

The comedian Don Mcmillan had a bit where presented some statistics on weddings.

Don McMillan frames marriage statistics in a hilarious way

You can watch the clip here.

“44% of marriages end in divorce.”

That means

“56% of marriages end in death”

“Take your choice, it’s one of those two! I’m not saying that I’m for divorce, it’s just that it’s better than the alternative.”

Well now. When he frames it that way, it’s not hard to see that as a possible conclusion. 

Prospect Theory

Now let’s take a look at a more serious example.

Imagine you’re faced with two programs to save lives:

  • Program A: Guarantees saving 200 people.
  • Program B: Has a 1/3 chance of saving 600 people and a 2/3 chance of saving none.

Did you choose the first option?

The second option creates the possibility that nobody can be saved, while the first option guarantees an outcome. Yet, both programs have outcomes equating to 200 lives saved.

Illustration of Tversky and Kahneman's Prospect Theory. Illustrating the Certainty Effect, Loss Aversion and Isolation Effects

Despite the equal outcomes, most people choose Program A to avoid risk when framed with the possibility of losing something. This again demonstrates how framing the same outcome can lead to different decisions.

This scenario was used in a famous experiment by Amos Tversky and Daniel Kahneman. We’ve included the link to their study at the end of the article.1

Effects and Outcomes of Gain and Loss Framing

According to Daniel Kahneman and Amos Tversky’s Prospect Theory, the way choices are framed affects decision-making.

The certainty effect happens when people prefer guaranteed outcomes compared to probable outcomes. This leads to people avoiding risk when there is one of their options has guaranteed results. The reverse is also true, where they want to avoid guaranteed losses and pick probable gains.

There’s also loss aversion at play here. The pain we feel from losses tends to be felt more than the joy from gains, so people try to avoid losses whenever they can.

Infographic – example of gain and loss framing

For example, instead of saying, “If you don’t accept, you’ll lose $2 a day,” frame it as, “Accepting this ensures you gain $2 a day.”

The isolation effect explains what we saw above, where two identical outcomes have different routes to attainment. Depending on how the options are framed, people are likely to cancel out similar-looking information to shortcut their thinking, arriving at varied conclusions.

How Does The Framing Effect Apply to Negotiation?

The framing effect will apply throughout the negotiation process, especially for concessions and offers.

Offers that are loss-framed will make people take more risks. We’re naturally loss-averse- When we’re afraid of losing something, we’re more likely to get up and do something about it. Conversely, offers with a gain or positive frame will make people take fewer risks.

This doesn’t just apply to final offers, but is key to giving the other side a ‘sense of winning’. Negotiations involve a series of offers and concessions and also the journey to get there.

You can frame some of your concessions with a gain frame that you’ve made them work for to make them feel like they’ve won something. To make this really effective, combine the framing of your offers and concessions based on what their interests are instead of their positions.

After all, even a fair, win-win offer won’t be accepted if the counterparty doesn’t feel satisfied with it.

 

Prospect theory is just one of the many psychological biases we can encounter during negotiations. Stay tuned, as we’ll be covering more of these in future posts.

At Negotiation Academy, we’re on a mission to make negotiation skills second nature to everyone because we believe that negotiation is one of the most influential skills for your career, life and business.

If you’d like to learn more about cognitive biases in negotiation or more about general negotiation skills, join our live sessions or online courses at Negotiation Academy. Start improving your negotiation skills today!

 

References:

  1. The Framing of Decisions and the Psychology of Choice Amos Tversky; Daniel Kahneman Science, New Series, Vol. 211, No. 4481. (Ja 30, 1981), pp. 453-458.