BUILDING TRUST VS MANIPULATION IN BUSINESS NEGOTIATION

We decided to start this article from surprisingly afar and touch upon issues more native to the subject of Philosophy rather than works relating to Psychology of business negotiations. However, it is the complex implementation of knowledge from various fields of scientific research and empirical facts arising from real-life experience of business negotiations that, from our point of view, should lay a foundation for a new middle-range theory [Merton, 1968] describing negotiation process in every aspect of its key interactions and demonstrating, at the same time, high practical applicability.

And we start with a fairly obvious statement indicating that our world is fractal: a small number of elementary particles and a few fundamental laws governing their interaction create an infinitely complex universe. Crowns of trees, riverbeds and coastlines are just a few examples of fractal structure of complex systems where each successive level in the hierarchy is, in fact, a scale replica of the previous one. But these are all phenomena of the tangible world.

And what about fractality of conceptions? Take, for example, Pythagorean concept of Harmonies of the World: a few millennia later it was embodied on a totally different dogmatic level in string theory that claims to be a universal theory comprising quantum mechanics and theory of relativity, which, in turn, draws its mathematical inspiration from acoustics and mathematical equations discovered several centuries prior to its appearance. Or take famous scientist Maxwell who, having discovered the fundamental unity of electric and magnetic interaction forces, unified them with a new, the then new and totally artificial variable into a single equation that described electromagnetic field and who by means of these purely theoretical constructs discovered electromagnetic waves, the existence of which was experimentally proved by Hertz almost twenty-five years later. And the list could go on.

But what if we assume that fractality of our world extends to the Humanities? What if fundamental scientifically grounded and time-honoured principles of negotiation have already been known to science? The only hitch is that such knowledge is scattered across a variety of multiple theoretical concepts and is now used to solve totally different issues. Meanwhile, having transferred this knowledge to the world of negotiations we can find a key to a deeper insight into this complex process.

What can modern science offer us in this regard? No doubt Psychology and Neuroscience have made a major breakthrough in the last half a century. Well, but what about implementation of mathematical achievements for the purpose of optimal game strategy research or looking for anything useful stemming from other scientific disciplines that comprise thousands years of human experience in transactions conclusion or, for example, in civil law that originated from a distant epoch of ancient Rome where private law managed to survive through centuries and various formations and is still studied by all lawyers on a mandatory basis? What do these phenomena have in common and why do they, despite being used to describe different manifestations of human activity, complement each other, while representing specific examples of the fundamental laws of human civilization evolution and, perhaps, at the same time turn out to be a key helping us to solve mystery of successful negotiations and building long-term partnerships?

We are unlikely to be able to present a comprehensive answer to all these questions in this article. However, we will definitely try to justify a simple thesis: development of a trust-based partnership is a Pareto-op- timal strategy for business negotiations enabling us to maximize benefits of all the participants to such negotiations as compared to deployment of manipulative strategies aimed at immediate profit gaining at the expense of one of the negotiating parties.

Let us recall one of the cases from author's personal experience.

The story took place in the early 2000s. The Russian economy was still growing at a fantastic pace, and the M&A market was an evident beneficiary of this growth as even prices for third - tier stocks could increase by tens and hundreds of percent annually. Participants of this market demonstrated vital interest in new deals and kept on looking for more opportunities to buy undervalued shares. Corporate wars turned out to be the best supplier of such assets: these wars initiated by companies infamous for corporate takeovers forced their victims to sell their shares for alms due to the legal and financial risks borne in the event of a loss in such a conflict.

And so, one day, several owners of an engineering institute which was under a threat of a hostile take-over asked one of the managing partners of a company known for making investments in distressed assets for help. However, they were not businessmen, rather quite mature and deeply honored scientists, infinitely far from the business world and seeing their Institute not only as a place of work and a source of income, but the meaning of their lives for many decades. Meanwhile, there was only one thing the raiders were interested in: the buildings occupied by the Institute could easily be converted into offices. Needless to say, that in those days scientific research was deemed to be totally unprofitable and was nothing of interest for the raiders. Having realized this, the group of scientists concluded that selling shares to these people would put an end to their scientific research and de facto ruin the most important part of their lives. And they would spare no efforts to protect their rights and values. However, they had no experience in standing their ground in such a stressful environment: they were scared and disoriented by strident rhetoric, manipulations and continuous psychological pressure exerted by the raiders who threatened them with bankruptcy and prosecution or who would send their people claiming that the game was up and the only way to secure at least a tiny chance to continue scientific research at the Institute was to sell the shares at rock-bottom prices.

The above-mentioned partner of the investment company, having instructed his lawyers to carefully examine the situation, concluded that at that moment the shareholders of the Institute were not really in danger. However, seeing the deteriorating financial performance of the Institute, he realized that in a year and a half the situation would turn into a critical one, and then as a result of bankruptcy, they would face a risk of losing not only the Institute itself, but all their money.

And he faced a dilemma: 1) he could either tell the scientists the truth thus calming them down and losing even a remote chance of taking advantage of their plight and buying their assets massively discounted, or 2) he could resort to manipulative strategies and by doing so increase their stress levels in an attempt to beat them to their knees hoping that they will offer him to buy their shares because selling their shares to the raiders would seem to be even a greater evil. But the latter option didn't stand much of a chance, because numerous months of the corporate wars made scientists accustomed to the idea that all consultants and investors they turned to did nothing but threw a scare into them for the sake of getting evident material benefits. Therefore, if our protagonist had tilted toward the second option, he would have been one of many, queueing in the long line of those willing to fatten up on the scientists.

And he made a very unexpected decision for a very common situa- tion of those days: he told the truth and reassured the scientists, saying that their way of life was under a threat not because of the raiders, but because of poor financial performance of their institute and that that was something up to them to fix and offered them free assistance to be provided by his lawyers to resolve possible legal issues with the aggressors. The scientists left elated. 30 days later, owing to the above-mentioned legal assistance, the corporate war was over, and the scientists lost touch with the protagonist.

One would think that the decision he made was devoid of sense from the point of view of business logic for he missed a remote chance to get quite a solid income. However, as it emerged later, he merely bartered an opportunity of getting opportunistic earnings for such an invaluable asset as trust. And the objective laws of human society evolution reimbursed him for such behavior not only in terms of giving him a sense of moral ascendancy, but also in terms of quite tangible material profits.

Ten months later, these scientists came back to him with an offer to purchase institute's shares on condition that he would make a commit- ment to modernize scientific laboratories and allocate money for their operation in the long term. As a result, an extremely profitable deal for both sides was concluded. And having done so, our protagonist asked his new partners about the events that had taken place in those ten months.

It turned out, that following the advice received, they really worked hard to make business work, but after months of struggle in a foreign field, they realized that they had much more propensity for solving sci- entific issues. Their lame endeavours to save the sinking ship of their business boosted their awareness level so that without any external intervention it became obvious to them that they could no longer keep the situation under control and had to sacrifice most of their assets in order to preserve the most important thing for them — the opportunity to pursue their scientific research. And in that case they would need not only a competent and resource-rich counterparty, rather a partner they could trust. And the only person among their acquaintances meeting these criteria was the protagonist of our short narrative.

But let us have a look at this case from another angle: can we say that there are formal distinctions present in influence techniques implemented to develop partnership and trust, and trivial manipulations aimed at gaining immediate profits at the expense of one of the parties?
After all, the protagonist of the story told above was well aware that such sincerity demonstrated to potential counterparties could contribute to their affinity towards him, and the mutual exchange rule would trigger a feeling that there was an unsettled debt as they paid nothing for the services provided by the lawyers.

And here we get back to existence fractality which, from our point of view, manifests itself in negotiation processes in deployment of similar influence for totally different purposes.

All manipulative techniques are basically designed to exploit the area of the unconscious in our brains so that the manipulator could con- sciously benefit at the expense of the other party. There is one thing all manipulators have in common: they fear conscious and critical attitude applied to their actions. They aspire to keep their negotiating partner under control through his spontaneous responses and therefore tend to take aggressively any attempts aimed to rationalize their actions. They need to be on the ball all the time.

Conversely, deployment of influence techniques aimed at trust development implies absolute openness and awareness of the fact that such techniques are being used and of the purpose of their use. Long-term partnership cannot be maintained if there is no trust, and trust cannot be maintained if there is no understanding regarding principles and values of another person, and most importantly if there is no practical evidence arising from partner's behavior and proving that his values and principles indeed reflect his inner guidelines, not only affecting but rather defining his behavior especially in case of conflict concerning his personal self- interests.

In fact, trust means letting your partner be on the ball by measuring up to such principles. In this respect, awareness is a marvelous ally of trust enabling us to validate compliance of counterparty's actions with the declared principles. In that case, partnership is not reduced to altruistic response in terms of business relations. Our experience indicates that business relations based on shared values put into practice and partners' awareness of their benefits arising from such cooperation are the most stable ones.

But what if our speculation regarding primacy of trust over manipulation in terms of negotiations is nothing but abstract moralizing and these are those opportunistic manipulators who rule the day in real life?

And once again we turn to fractality of this world and Roman law, which has survived through the millennia of human history and successions of various social formations, each relying on its own basic principles of equality, good faith, free will, rationality and justice. Just like fundamental laws of physics, deeply rooted into neural networks of our brains, these abstract concepts predetermined evolutionary trend of Homo Sapiens. And Roman law was the first to put them into writing in the course of human history. And then natural selection came into play, allowing societies and states adhering to these principles to win the evolutionary race of supporters of other legal systems based on different values and principles, ranging from antique laws of Ancient Egypt and Mesopotamia to early-medieval laws of the barbarian states etc. It is due to Roman law that all modern legal systems protect parties behaving in good faith and punishing those abusing rights of their partners by means of withholding or providing with misleading information or taking advantage of their plight.

Humanity has gained an undeniable competitive advantage over all other animal species due to its intelligence and ability to develop com- plex social structures aimed at long-term cooperation for the good of collective benefit. In the course of natural selection all other types of be- havior were eliminated for the reason of being less effective. Our empiri- cal observations suggest that the more successful a businessman is, the more concerned he is about his reputation and maintaining trust with his social circle. In such an environment, implementation of manipulative techniques among individuals with well-developed empathy and a high awareness level will only result in waste of their social capital.

Now it's high time we refferred to fractals again: back in 1937, Ron- ald Coase in his article "the Nature of the Firm" [Coase, 1937] gave an economic rationale explaining why people established partnerships, companies and other organizations but not just limited themselves to repeated conclusion of bilateral transactions with unknown contractors. In fact, it is all about transaction expenses emerging from transactions concluded with strangers who believe that apart from the actual price, we incur informal expenses such as collecting and processing information, negotiating and decision-making, keeping control and expenses arising from legal protection of contract execution.

These costs can be reduced through establishment of various kinds of partnerships. And once again the rational advantage of a trust-building strategy over manipulative opportunism is obvious. This being said, I recall our conversation with an extremely successful investor from Sili- con Valley. When asked whether from his point of view startups would often deceive investors, he answered: "Rarely would they do it if ever. Cheating is extremely unprofitable — it's a small world and information spreads quickly, having done that they will be unlikely carry on business like nothing is wrong."

And finally, our evidence would be incomplete if we did not bring mathematics to our side as the most exact science, and never recalled the iterated prisoner's dilemma (IPD), first introduced by Robert Axelrod in his book "The Evolution of Cooperation" [Axelrod, 1984] in 1984. In this book, he describes a tournament, participants to which have to make a choice between cooperation and betrayal over and over again, bearing the previous results in mind. However, the participants to it are not real people, rather computer strategies developed by scientists that had been invited by Axelrod. These strategies are different from each other in terms of algorithmic complexity, initial hostility, ability to forgive and so on.
Axelrod discovered that playing the game for a long time among multiple players implementing various strategies, greedy strategies in the long run would result in nothing good, whereas their more altruistic counterparts did much better in terms of their own interest. This is an illustrative example demonstrating a possible mechanism of evolution, where selfish behavior is turned into altruistic behavior through the mechanisms of natural selection.

Moreover, the most fruitful strategies helped Axelrod identify the crucial interaction principles within the framework of this dilemma and such principles can now be implemented in the negotiation process [Axelrod, 1984, p. 122]:

1. Don't be envious. People tend to resort to the standard of com- parison that they have available — and this standard is often the success of the other player relative to their own success. This standard leads to envy. And envy leads to attempts to rectify any advantage the other player has attained. In this form of prisoner'a's Dilemma, rectification of the other's advantage can only be done by defection. But defection leads to more defection and to mutual punishment. So envy is self-destructive.
   
   
2. Don't be the first to defect. The single best predictor of how well a rule performed was whether or not it was nice, which is to say, whether or not it would ever be the first to defect.
   
   
3. Reciprocate both cooperation and defection. The extraordinary success of TIT FOR TAT leads to some simple but powerful advice: practice reciprocity. After co-operating on the first move, TIT FOR TAT simply reciprocates whatever the other player did on the previous move. This simple rule is amazingly robust. TIT FOR TAT not only won the tournament itself, but did better than any other rule in hypothetical future rounds.
   
   
4. Don't be too clever. too much complexity can appear to be total chaos. If you are using a strategy which appears random, then you also appear unresponsive to the other player. If you are unresponsive, then the other player has no incentive to co-operate with you. So being so complex as to be incomprehensible is very dangerous.

This means that mathematical analysis also proves that negotiation strategies based on simple and transparent principles, aimed at trust and partnership development in the long term prevail over their selfish and opportunistic alternatives. Only under one condition though: altruists should be able to give recompense for unfair behavior. This is what dis- tinguishes successful partnership strategies from their enthusiastic alter- natives, seeking universal harmony and enthusiastic acceptance of any behavior of their interlocutor guided by the "win-win" logic. On the contrary, we believe that aspiration to spur counterparty to adoption of a partnership-based communication model encourages us to reinforce his behavior aimed at cooperation, and punish him for destructive and selfish actions, including punishing through the conscious use of ma- nipulative techniques. And of course, we cannot but accept the fact that in a particular transaction your partner's benefit might exceed your own benefit for, as fractality of this world teaches us, this circumstance boosts our chances of getting even more benefits next time.
But where is that fine line between a manipulator and a subtle nego- tiator willing to build trust? It seems that, as we have already mentioned, it is drawn in fundamental human values. A successful negotiator shall have his own unshakeable principles, first of all, regarding integrity, Bo- nae Fidei (lat.), proved on a regular basis by means of objective actions and inf luence techniques synchronized with them and aimed at building a long-term trust relationship.



Reference

Merton R.K. (1968) Social Theory and Social Structure (1968 enlarged ed.). New York: Free Press.
Coase R. (1937) The Nature of the Firm // Economica. Blackwell Publishing. 4 (16). P. 386–405.
Axelrod R. (1984) The Evolution of Cooperation. Basic Books.