The following article by Neil Irwin was posted on the New York Times website April 27, 2017:
In 1987, the real estate developer Donald J. Trump wanted to buy an airplane. He sensed that the seller of the Boeing 727 was desperate, so he first offered a mere $5 million, “which was obviously ridiculously low,” he wrote in “Art of the Deal.” He boasts of buying the plane, worth $30 million new, for just $8 million.
This week, we saw the public policy equivalent of a $5 million offer for a $30 million plane.
The Trump administration demanded funding of its border wall as part of a deal to keep the government open, proposed a huge cut in taxes on businesses that would reduce government revenue by trillions, and leaked plans to abandon the North American Free Trade Agreement to try to force Canada and Mexico to agree to better conditions.
It is an approach that has defined Mr. Trump’s deal-making career: Make some seemingly outlandish offer as a starting point for negotiations to try to shift the entire frame of reference for the haggling that will follow. This strategy can certainly work in some circumstances. It also has distinct limits in complex negotiations like those in public policy, as the administration’s experience this week shows.
This strategy is also the opposite of the one often pursued by the last occupant of the Oval Office. President Obama tended to introduce policy proposals that were relatively close to where a negotiation with Congress might plausibly end up — often to the consternation of liberals, who felt he was negotiating against himself.
The Trump approach can have an “anchoring effect” of shaping the terms of the negotiation.
“The benefit of starting aggressively is that if a deal is reached, it is likely to be more advantageous to you,” said Deepak Malhotra, a professor at Harvard Business School and author of “Negotiating the Impossible.” “But there are also many risks, and these risks are much greater in politics.”
In particular, staking out an extreme position can very well shut down any further negotiating. If you think your negotiation partner is fundamentally unreasonable, you might choose not to engage at all. Think of how you might respond if you were selling a house that you believed was worth $500,000, and somebody offered $100,000. You’d probably be unwilling to discuss a sale unless the bidder came back with a more plausible number.
That’s even more true when public image and credibility are on the line, as they always are in politics.
“Aggressive offers make it hard for parties to save face or declare victory later in the negotiation process — and this is especially crucial in politics,” Mr. Malhotra said.
In Mr. Trump’s 1987 negotiation over buying an airplane, staking out an extreme offer carried minimal risk and probably resulted in his getting a better price than if he had been less aggressive. The worst thing that could happen to Mr. Trump would be that no deal happened and he would need to find another airplane to buy.
But in these policy issues, both the president and his negotiating partners have their public reputations on the line. If Democrats were to give in on funding the border wall, they might lose any hope of gaining seats in the midterms. If the extreme starting point on taxes prevents Democrats or deficit-hawk Republicans from even coming to the table for negotiations, that could make it harder for any tax deal to happen.
And this is even more true when there is some element of a bluff involved, as the Trump administration’s counterparties have clearly concluded.
Think of a bluff and a lowball offer as tools that are often used in tandem — any time someone makes an extreme offer but is either explicitly or implicitly lying about what will happen if it is not accepted.
The problem is that when deal-making is in the public sphere, it’s particularly hard to pull off an extreme bluff. For one thing, Mr. Trump’s reputation for using the technique precedes him. For another, on public issues like the budget or trade agreements, the other parties to the negotiation have a pretty good idea of what the Trump administration has to lose if no deal is struck.
On trade, for example, negotiators for Mexico and Canada are well aware of the economic damage that would befall the United States in the event Nafta were unwound. And they’re aware of the major industries and political leaders who would attack President Trump for letting it happen.
On funding the government this week, Democrats have been confident that the Trump administration would bear the blame for any government shutdown, and thus have been unwilling to entertain any major spending on a border wall.
Pairing an aggressive request with a bluff, in other words, works best when the other party is both in a desperate situation to make a deal and can’t know for sure whether your threat is real.
“In many years of teaching negotiations, I’ve seen many people becoming enthralled with the apparent power of making extreme first offers,” said Daniel Ames, a professor at Columbia Business School. “They sometimes get ‘anchoring fever,’ jumping at the chance to put the first offer on the table and making that number strain credulity. To be sure, it can work.”
But Mr. Ames said: “When the proposal is overly brash, our counterparts don’t just blindly capitulate. Sometimes they come back with an outrageous offer in the other direction. And in a good share of cases, they simply walk away.”
View the post here.