Suppose you received the following two proposals:
“Problem 1… Imagine that the U.S. is preparing for the outbreak of an unusual Asian disease, which is expected to kill 600 people. Two alternative programs to combat the disease have been proposed. Assume that the exact scientific estimates of the consequences of the programs are as follows:
If Program A is adopted, 200 people will be saved.
If Program B is adopted, there is a one-third probability that 600 people will be saved and a two-thirds probability that no people will be saved.”
Which of the two programs do you favor? (Thinking Fast and Slow, Pg. 436)
The above question comes from Daniel Kahneman’s book Thinking Fast and Slow, and the survey results showed that 72% of respondents preferred the more reliable Program A, as opposed to 22% who supported Program B. Apparently, people generally think we should take the sure bet and save 200 people rather than roll the dice.
But another group of people were offered two different programs to select between,
“If Program C is adopted, 400 people will die.
If Program D is adopted, there is a one-third probability that nobody will die and a two-thirds probability that 600 people will die.” (Thinking Fast and Slow, Pg. 437)
I hope you’ve noticed that these two programs are identical to the first two; they are just worded differently. Well, what happened? The results flipped. This time 78% supported the roll of the dice and only 22% supported the reliable option.
It was the mere fact that in the first set of questions, it refers to lives saved and then in the second option, it refers to the number who die that caused over a 50 point swing! Think about that the next time you see some political poll.
How to Invest in Real Estate While Working a Full-Time Job
Many investors think that they need to quit their job to get started in real estate. Not true! Many investors successfully build large portfolios over the years while enjoying the stability of their full-time job. If that’s something you are interested in, then this investor’s story of how he built a real estate business while keeping his 9-5 might be helpful.
Framing Things as Gains or Losses
The bias here is that people will gravitate toward things that are framed as gains and away from things that are framed as losses. “Lives saved” is a gain and “people will die” is a loss. This is a consistent cognitive bias our species is stuck with. And if there is one lesson to be learned from psychology, it is that people have intrinsic biases. As Kahneman and others have shown, people will generally become irrationally aggressive when there is a small chance of winning and irrationally conservative when there is a small chance of losing.
People will allow anchors, such as the first number mentioned in a negotiation, to dramatically affect their position even if the anchor is given no support whatsoever (a concept I talk more about here). People are generally overly optimistic about the future. They almost always underestimate the cost and time required, instead of the other way around. People are overly loss averse and have an irrational fixation on not losing money on any particular transaction (i.e. “I’m into 123 Main street for X dollars, so I need to get at least that out of it”). Indeed, the list goes on.
What’s so important about these biases is that they make not only what we say, but also the way we frame any sort of interaction with other individuals so important. Two people can say the same thing, and one can be completely effective and one can be completely ineffective in conveying it. To use an example from our office, our former bookkeeper used to complain about virtually everything, much of it admittedly legitimate. One day, she asked our operations manager why when the manager complained about a problem, people would listen, but when our bookkeeper complained, people seemed not to want to hear it.
“It’s because I try to offer a solution as well. Most people don’t want to just be burdened with more problems,” our operations manager responded. Indeed, it’s all in the way you frame it.
The first thing to do in order to take advantage of the power of framing is to simply be kind and respectful. Try to get someone to change their mind by yelling at them. As Dale Carnegie noted, “Criticism is futile because it puts a person on the defensive and usually makes him strive to justify himself” (How to Win Friends and Influence People, Pg. 23). It’s absolutely amazing what a calm voice and a little bit of respect can do.
Providing a Narrative
Another great tool regarding framing is what could basically be called a narrative or a justification. If you simply send out your offer to someone, you’ve provided no frame. Sometimes, if you’re just making offers in volume like we do on MLS-listed properties, that’s fine. But if you have a chance to justify your offer, this gives you a crucial edge.
In a recent negotiation I discussed here, I brought the owners into our office to meet with my brother and me. I then framed our offer by explaining the repairs that needed to be done to the property and the assumptions I had to add to his operating statement (for example, he managed himself and so I had to put in a management fee). Then I explained that it needed to be at a certain cap rate for it to work for us and showed them what offer price that cap rate justified.
Dave Lindahl has said that “a confused mind says no,” and I think I would add that “an unjustified offer causes offense.” Or it’s simply rejected out of hand. But by making your rationale ahead of time, you have framed the offer. Now it’s not some low ball offer, but an offer that makes sense. Indeed, many (probably most) sellers are overly optimistic about how much their property is worth. Part of your job is to calmly, kindly and respectfully dissuade them of these illusions.
I should note that you should try and highlight any gains, while avoiding discussions of any losses the seller might perceive. As noted above, people avoid losses, so don’t frame things as such. This seller was doing a lot of flipping and wanted to get back into it. So we made sure to talk about how helpful it would be to his flipping operation to free up money from the sale of this property. We didn’t focus on how we were offering less than a previous buyer who couldn’t get financing.
Framing is also important all throughout your business. It may feel euphemistic to say you’re “letting someone go” instead of “firing them,” but it comes off a lot better and can smooth over those tough conversations. My brother Phillip has become the master of tenant relations by always framing interactions so that he is on the tenant’s side and something else is the antagonist, be it the lease, owner, law or whatever. This method of framing got one tenant to go from suing us to wanting to re-lease from us in one 15 minute conversation!
Framing exists in every context of business and life in general, whether you like it or not. So it’s critical to be aware of how it works and how best to frame things in any given situation. It could be in a negotiation like that discussed above, or in simply saying something like, “They both look great, but I think I like the other one a little bit more” instead of “Yeah honey, you know, it’s funny you should ask because you kind of do look fat in that.”
How do you use framing to win real estate negotiations (and change perceptions in day to day life)?
Leave your comments below, and let’s discuss!