Knockout Negotiating

Go find your junior high school math teacher and say you’re sorry. You owe them an apology because, after relentless complaining, it seems like they were right all along when they put up with the question, “Why do I need to show my work if I have the right answer?”

What seemed like an unnecessary chore for your pre-algebra homework is an essential part of what can make someone a strong negotiator.

Too often, what makes a person think he is a good negotiator is his perceived ability to “drive a hard bargain.” More often than not, someone who thinks he is a stern negotiator is actually obstructive to the negotiating process. In the worst-case scenario, a person’s poor negotiating tactics might end up resulting in a deal that is actually worse off than had a different negotiator been involved.

For instance, sometimes, if an attorney or claims adjuster fails to take that junior high step of “showing their work” in his effort to drive a hard bargain in settlement negotiation, he might end up settling the case, but at a much higher dollar amount than would have originally been necessary. Here is a quick case study:

On Jan. 25, 2002, The Wall Street Journal published an article entitled, “No Bites on Tyson House”—an intentional wordplay on the home of former world champion boxer Mike Tyson, famous in part for allegedly biting the ear of fellow boxer Evander Holyfield during a match in 1997. Tyson’s real estate adventure can be chronicled like this: In 1997, Tyson purchased a home for $2.7 million. Immediately after the purchase, he put about $1 million worth of upgrades into the home, including adding a health club-style gym and a nightclub.

One year after purchase, Tyson listed the home back on the market for a staggering $22 million (over five-times his total investment). With no offers, Tyson dropped the price of the home to $12.9 million in 1999. He dropped the price again, this time all the way down to $5 million, in 2000, before ultimately taking the house off the market altogether.

After the article was published by The Wall Street Journal in 2002, the home was finally sold in 2003 to rapper 50 Cent for “only” $4.1 million. 50 Cent refused to learn from Tyson’s past and invested another $6 million into the property before listing the house for sale with a $18.5 million list price (almost double the rapper’s original investment). The home sold in 2019 for $2.9 million, a loss of approximately $7 million before adjusting for inflation.

If a different negotiating strategy was employed, maybe Mike Tyson would have sold his home earlier or 50 Cent would not have been forced to eat a multimillion-dollar loss. Tyson and 50 Cent clearly saw an opportunity to make a one-sided deal and tried to jump on it. Unfortunately, the one-sided deal that 50 Cent ended up settling on was one-sided in the wrong direction for him. But let’s break it down—what happened? What went wrong?

Whether Tyson or 50 Cent ever believed they were going to sell the home for more than double their original investments (or quadruple, in Tyson’s case) is unknown. Maybe Tyson and 50 Cent were speculating too optimistically on the housing market. Maybe it was hubris and either or both thought the mere fact that they owned the house would increase the market price to such an incredible level. Maybe it was an opening starting point and each had every intention of haggling once there was an interested buyer. Or maybe both were simply the victim of bad financial advice. In any event, their initial opening asking prices were likely the point that killed all negotiations before they started. Each failed to show his work and, instead of communicating their rationale, all they communicated was that they likely had an unreasonable valuation of the price of the home and any future negotiations would be a waste of time. An optimistic opening offer is one thing. An unrealistic opening offer is something else completely.

In his book, “Bargaining for Advantage: Negotiation Strategies for Reasonable People,” G. Richard Shell defines an “optimistic opening offer” as “the highest (or lowest) number for which there is a supporting standard or argument enabling you to make a presentable case.” In the world of insurance claims defense, this means the lowest possible settlement offer that you can reasonably support with facts or evidence. Neither Tyson nor 50 Cent could reasonably support their opening list prices. Neither were able to “show their work” like in their pre-algebra homework, but, if they were able to, maybe there was an opportunity to negotiate.

Shell explains, “Your opening need not be supported by your best argument, just a presentable one.” In claims adjusting and litigation defense, that means explaining how you arrived at the number you are using in settlement negotiations. Are you using the archaic “three-times medicals” method? Are you differentiating between diagnostic procedures versus treatment designed to target specific symptoms? Are you discounting certain special damages based on questionable evidence, claimant credibility, or a favorable venire? Do you have a strong argument for allocation of fault?

However you arrived at the number you are using, you need to be able to make a reasonably presentable case to justify your offer. Failing to do so risks making the other side have the same questions that were just posed regarding Tyson and 50 Cent: Is this attorney/adjuster getting bad advice? Does he actually think this claim is only worth this much? Or, worse still: Are they just that arrogant where they think this number has merit for the sole reason that they are making the offer?

Remember, your rationale need not be your honest assessment of the case or the strongest argument you can make. Maybe you think the most fault a jury would allocate to the claimant would be 25%, but if you can posture and make a reasonably presentable argument for a 50-50 allocation, then do that in your opening offer. In that scenario, posturing the case as a no-liability claim for the defense is likely as unreasonable as Tyson listing his home for $22 million.

Ninety-nine times out of 100, a pending claim is going to settle. The fact that you were able to settle the claim is not a sign that you were a good negotiator. Maybe the case settled for more than it should have and it ultimately reached resolution not because of your negotiating tactics, but in spite of them. Use whatever number is most beneficial for your client in settlement negotiations, but explain how you got there. Show your work. And apologize to your math teacher.