When Seemingly Rational People Act Irrationally


There are two fundamental premises that are helpful when proceeding with any negotiation.  First, people ultimately tend to act in an economically rational manner. Second, if someone who is seemingly intelligent and rational is acting in an economically irrational manner, there are one of two explanations:  (1) they are not as smart or rational as you thought or (2) they are privy to certain facts or circumstances which, if known to you, would reveal that they are in fact acting in an intelligent and rational manner.  Economic rationality is pretty straightforward.  People don’t generally act in ways that are adverse to their economic interests.    As a result, if someone is acting in ways that defy explanation, it’s a good bet you don’t know something that that the other party knows and it behooves you to find out the facts.

Recently we were representing a fairly large tenant in a building that was in distress.  Our client’s lease was expiring and we were looking to expand and extend our lease.  Our negotiations dragged on with the landlord who repeatedly claimed he was working on trying to get his lender to approve our deal.  Our client was the second largest tenant in the building and the largest had just announced it was moving.  The debt on the building was greater than the building’s value and if we vacated, the building would be virtually empty.  An expansion and extension seemed like a no brainer for all parties and we couldn’t understand why this deal wasn’t happening more quickly.  In order to incent us from moving, the landlord was able to provide several short term extension with relative ease.  Because the loan was not technically in default, the lender would not have direct discussions with us.

Given the building’s situation, their failure to wrap up our deal made no sense.  Our landlord was very sophisticated and there was no doubt we were dealing with an intelligent and rational person.  Something had to be going on that we did not know about.  We did some digging.  It turned out the landlord was in negotiations with the lender to buy out the note on the building.  Now everything made sense.  If the landlord was able to ink a new, larger lease with our client before the note purchase negotiations were completed, the building’s value (and, therefore, the note’s value) would be enhanced and the purchase price would be higher.  Thus, the landlord was no doubt delaying our deal until he was able to strike a favorable note purchase agreement.  However, he needed to be careful in the process.  If we grew too frustrated and inked a move deal, the risk of the landlord’s potential investment would increase (i.e., he would be buying the note on an empty building). In the best of all worlds for the landlord, they could keep us in the building on a series of short term extensions (which were of no value for the building or lender from an underwriting perspective) until the note purchase was consummated and then he could strike the long term extension with our client (thereby immediately recognizing a gain on his investment).  Once their strategy became clear, their behavior was explained and their actions were perfectly rational.

Knowing that the landlord had no intention of locking us up with a  long term deal any time soon, we used the short term extensions to our advantage and executed on a move alternative.  The fact that we were able to extricate ourselves quickly from an existing arrangement was of tremendous value to the new landlord and enabled them to provide a compelling deal for our client.  Had we not delved into the incumbent landlord’s motives, our renewal efforts may have dragged on to a point that our move alternative disappeared.  We turned the tables on the landlord and used his delay tactics to our advantage.

Too often in negotiations, we dismiss the actions of the other party as being uninformed, irrational or even dumb.  Oftentimes this is not the case.   Successful business people didn’t get where they are by being irrational.  Next time you are in a negotiation and the other party is acting in a way that doesn’t make any sense, take a step back and do some digging.  What you find may surprise you and even change your current direction.

For more information contact Glenn Blumenfeld

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