There’s a relatively new field of economics called Behavioural Finance which studies the influence of psychology on human behaviour in financial decision-making. It seeks to explain why we behave irrationally.

Interestingly, a similar type of irrationality can creep in when we negotiate. It starts with what psychologists call “heuristic cues”. We all use them because we’re wired to and they strongly influence our perceptions, interpretations and judgments.Heuristics are the “mental shortcuts” that we draw upon to make judgments and decisions under conditions of uncertainty. The heuristic-systematic cognitive model was first introduced in the 1970’s and its framework has since been researched extensively in the field of consumer choice and brand name selection.

Decades ago, the TV Ad for Colgate toothpaste used to show a guy wearing a white coat – well, that Ad was exploiting a heuristic cue called the “halo effect” – he looked like a dentist or scientist so he must know what he’s talking about, right? Aside from brand selection, this particular cognitive model also helps us understand how information sources contribute to judgments that we make about ourselves and others as well as issues or objects. It divides cognitive processing into two forms:

• Systematic (high-effort), involving the comprehensive analysis of judgment-relevant information; and
• Heuristic (low-effort), which involves minimal cognitive effort because judgments are formed based on easily processed “cues” sourced from stored memory associations.

The theory proposes that humans unwittingly make judgments in an emotional rather than intellectual way and, unless otherwise motivated, and in the interests of economy, tend to process information on a minimal basis and take the path of least effort. So, the low-effort heuristic mode employs simple rules-of-thumb, for example, stereotypes, to short-cut judgments.

When shopping for mundane consumer items like toothpaste, we are more likely to engage in heuristic processing because we are not motivated to put effort into the decision given time constraints and the relatively low price point. These mental shortcuts provide a faster means of processing by way of a superficial consideration of cues. We can simply recall the white coat of the expert advocate and accelerate the decision to purchase Colgate toothpaste.

Selecting a dentist to work on your teeth generates more motivation than choosing toothpaste but there is less ability to conduct systematic processing. There are no signs indicating that the instruments are sterilised to 180º c and subjected to eight hours of gamma radiation. However, should coffee at the surgery be served in chipped cups covered in lipstick; the patient’s confidence gap would widen and may encourage a degree of systematic processing such as internet searches etc. If the beverage was served in a clean white cup the patient would assume the dentist is doing whatever is necessary with respect to sterilisation and the confidence level would probably have reached the sufficiency threshold.

The systematic processing mode requires both cognitive ability and capacity and is less likely to occur in situations where there are time constraints such as a being put on the spot in a face-to-face negotiation. In these settings, we are all cognitively hardwired to make simplifying assumptions in order to process and apply information. Cognitive biases tend to flourish and, filling in the blanks using faulty assumptions can lead us astray when anticipating the outcome.

Let’s look at how these biases work in the negotiation context. In 2011, Qantas became embroiled in industrial action which culminated in management taking the extraordinary act of grounding its entire fleet of aircraft. Negotiations became heated during the bargaining of a new enterprise agreement when the airline announced its intentions to launch a new airline in Asia. At stake, then, were issues such as Qantas pilots operating Qantas flights, shifting operations to Asia, outsourcing the jobs of Australian Qantas pilots and damage to the Qantas brand.

Animosity between the workforce and Qantas’s CEO became very personal. The pilots drew attention to the CEO’s large salary. Many heuristic biases may have been at play, the most obvious being “Stereotyping” and “Availability”. The parties had fallen into a common negotiation trap by making bold statements (e.g. “brand under threat”) which escalated the commitment and the sunk cost. Stereotyping becomes prevalent in these situations and is self-perpetuating if communication shuts down so each party blames the stance taken on the personality of the other. “Availability” is a memory-based heuristic predicated on the ease with which relevant examples spring to mind. Imagining an event increases its availability and makes it appear more likely.

Each party may be overweighting vivid concerns and focusing on available cues to make inferences about the other’s personality. The pilots and management seemed to be blaming the personality of the other instead of the situation (the company’s economic crisis). Visually imagining the personality trait increases its availability and makes it appear more likely. Both camps have examples that could readily spring to mind. The pilots could have associated the CEO with the memorable character of Gordon Gekko, the unscrupulous corporate raider from the 1987 film “Wall Street” who became a symbol for unrestrained greed. Ironically, the film’s plot involved Gekko seeking to profit from the break-up an airline company (Blue-Star Airlines) and featured heated negotiations with union leaders who were focused on building the business to preserve jobs (“Halo Effect”). The references to executive salary increases would reinforce the image of greed.

The management team would undoubtedly recall the infamous 1990/91 pilot’s strike in Australia when Bob Hawke, the then Prime Minister, co-opted the RAAF to help ferry stranded passengers. During the dispute there was little community support for the well-paid pilots who had stopped work for a 29% pay rise. Both sides probably had their judgments clouded by powerful heuristic biases together with the assumption that each side’s interests are diametrically opposed (fixed pie assumption) which stymied the search for mutually beneficial tradeoffs.

In the end, the Fair Work Commission had to step in as a mutually satisfactory resolution eluded the parties due to their inability to frame the dispute as a joint problem to solve and, instead, descended into the classic blame game.