Tag Archives: money

First Offers and Aggressive Offers: Optimal Negotiating Tactics

When nego­ti­at­ing ensure that you make the first offer and make sure it’s an aggress­ive one: this is almost always the optim­al nego­ti­ation strategy. That’s the con­clu­sion from a study look­ing at nego­ti­ation tac­tics and the anchor­ing effect (from the same research­ers that dis­covered the optim­al start­ing prices for nego­ti­ations and auc­tions).

One of the research­ers gives a good over­view of the study’s find­ings in an art­icle for Har­vard Busi­ness School’s Work­ing Know­ledge that provides suc­cinc­t nego­ti­ation tac­tics and reas­ons for why you should make the first offer. Top­iccs include: when you should not make the first offer, how to counter first offers, how to con­struct a reasonable—yet aggressive—offer, how to pro­tect your­self from the effects of anchor­ing, and more.

Some key points worth con­sid­er­ing (in no par­tic­u­lar order):

We might expect experts to be immune to the anchor­ing effect. Real estate agents, for example, should be able to res­ist the anchor­ing effects of a prop­er­ty’s list price because of their pre­sumed skill at estim­at­ing prop­erty val­ues. Test­ing this the­ory, [it is clear that] anchors affect the judg­ment of even those who think they are immune to such influ­ence. But why?

Every item under nego­ti­ation (wheth­er it’s a com­pany or a car) has both pos­it­ive and neg­at­ive qualities—qualities that sug­gest a high­er price and qual­it­ies that sug­gest a lower price. High anchors select­ively dir­ect our atten­tion toward an item’s pos­it­ive attrib­utes; low anchors dir­ect our atten­tion to its flaws. […]

The prob­ab­il­ity of mak­ing a first offer is related to one’s con­fid­ence and sense of con­trol at the bar­gain­ing table. Those who lack power, either due to a nego­ti­ation’s struc­ture or a lack of avail­able altern­at­ives, are less inclined to make a first offer. Power and con­fid­ence res­ult in bet­ter out­comes because they lead nego­ti­at­ors to make the first offer. In addi­tion, the amount of the first offer affects the out­come, with more aggress­ive or extreme first offers lead­ing to a bet­ter out­come for the per­son who made the offer. Ini­tial offers bet­ter pre­dict final set­tle­ment prices than sub­sequent con­ces­sion­ary beha­vi­ors do.

There is one situ­ation in which mak­ing the first offer is not to your advant­age: when the oth­er side has much more inform­a­tion than you do about the item to be nego­ti­ated or about the rel­ev­ant mar­ket or industry. […]

How extreme should your first offer be? My own research sug­gests that first offers should be quite aggress­ive but not absurdly so. Many nego­ti­at­ors fear that an aggress­ive first offer will scare or annoy the oth­er side and per­haps even cause him to walk away in dis­gust. How­ever, research shows that this fear is typ­ic­ally exag­ger­ated. In fact, most nego­ti­at­ors make first offers that are not aggress­ive enough.

 

Abstraction to Increase Effort (and Spending)

When there is a medi­um placed between our effort and a desired out­come, we strive to max­im­ise this medi­um regard­less of wheth­er or not it leads optim­ally to that out­come (think points or vir­tu­al cur­ren­cies as a medi­um when attempt­ing to obtain goods).

That’s my attempt at a con­cise sum­mary of the find­ings from a study coin­ing the phrase ‘medi­um max­im­isa­tion’.

This example taken from the paper (pdf) and presen­ted by The New York Times may help:

Stu­dents were giv­en a choice between two simple tasks. One would take six minutes, and the stu­dents were told that they would get a gal­lon of Haa­gen-Dazs vanilla ice cream as a reward. The oth­er would require sev­en minutes of work, and the pay­ment would be a gal­lon of Haa­gen-Dazs pista­chio.

Not sur­pris­ingly, since the second option involved more work and a less pop­u­lar fla­vor, only about a quarter of the stu­dents chose it.

But the research­ers also repeated the exper­i­ment with a couple of tweaks. In the new ver­sion, the six-minute task led to a pay­off of 60 points, and the sev­en-minute task brought 100 points.

The research­ers then told the stu­dents that any­one who fin­ished with between 50 and 99 points would be giv­en a gal­lon of vanilla ice cream. Any­one with 100 points would get pista­chio.

Prac­tic­ally, there was no dif­fer­ence between the two exper­i­ments. But the out­comes ended up being very dif­fer­ent.

In the com­ments of a pre­vi­ous post of mine look­ing at the denom­in­a­tion effect, the idea that “the great­er the level of abstrac­tion, the more ready we are to spend” was mooted. So it seems to be the case here.

via @BFchirpy

Negotiating Over ‘Sacred Values’

When reques­ted to give up a “sac­red value”, the inclu­sion of a fin­an­cial incent­ive incites mor­al out­rage, decreases gen­er­al sup­port for a com­prom­ise, increases anger and increases a sub­ject’s approv­al of “viol­ent oppos­i­tion”.

Research look­ing at our reac­tions to such pro­pos­als offer­s same sug­ges­tions for nego­ti­at­ing over sac­red val­ues.

A more suc­cess­ful tack for nego­ti­at­ing over sac­red val­ues, as it turns out, is to simply use the right words. Wheth­er dis­cuss­ing nuc­le­ar dis­arm­a­ment or reluct­ance to sell one’s lucky mug at a gar­age sale, using spe­cif­ic rhet­or­ic­al strategies can make trade-offs seem less taboo and can facil­it­ate con­flict res­ol­u­tion. […] One tac­tic is to describe tradeoffs in terms of “costs and bene­fits” and “ana­lys­is” rather than in terms of sac­red val­ues and money. This vague util­it­ari­an lan­guage appears to mask the emo­tion-laden taboo nature of the exchange. Anoth­er strategy is to emphas­ize the dire, oblig­at­ory nature of the trade-off. For example, people are more will­ing to sell their body organs for med­ic­al trans­plants when told it is the only way to save lives because this fram­ing pos­its the exchange as one sac­red value for anoth­er. In an age where many of the most volat­ile con­flicts stem from sac­red causes, and politi­cians have ques­tioned effect­ive­ness of dip­lomacy, under­stand­ing how to best nego­ti­ate about these issues has nev­er been more crit­ic­al.

via Schnei­er on Secur­ity

A Summary of Happiness Research

Dav­id Brooks brings ‘hap­pi­ness research’ back to the wider pub­lic’s atten­tion with a suc­cinct sum­mary of research into what does and does not make us happy:

Would you exchange a tre­mend­ous pro­fes­sion­al tri­umph for a severe per­son­al blow? […]

If you had to take more than three seconds to think about this ques­tion, you are abso­lutely crazy. Mar­it­al hap­pi­ness is far more import­ant than any­thing else in determ­in­ing per­son­al well-being. If you have a suc­cess­ful mar­riage, it does­n’t mat­ter how many pro­fes­sion­al set­backs you endure, you will be reas­on­ably happy. If you have an unsuc­cess­ful mar­riage, it does­n’t mat­ter how many career tri­umphs you record, you will remain sig­ni­fic­antly unful­filled.

Brooks goes on to look at the con­fus­ing cor­rel­a­tions between hap­pi­ness and wealth before dis­cuss­ing the wider “cor­res­pond­ence between per­son­al rela­tion­ships and hap­pi­ness”:

The daily activ­it­ies most asso­ci­ated with hap­pi­ness are sex, social­iz­ing after work and hav­ing din­ner with oth­ers. The daily activ­ity most injur­i­ous to hap­pi­ness is com­mut­ing. Accord­ing to one study, join­ing a group that meets even just once a month pro­duces the same hap­pi­ness gain as doub­ling your income. Accord­ing to anoth­er, being mar­ried pro­duces a psych­ic gain equi­val­ent to more than $100,000 a year.

If you want to find a good place to live, just ask people if they trust their neigh­bors. Levels of social trust vary enorm­ously, but coun­tries with high social trust have hap­pi­er people, bet­ter health, more effi­cient gov­ern­ment, more eco­nom­ic growth, and less fear of crime (regard­less of wheth­er actu­al crime rates are increas­ing or decreas­ing).

via Fred Wilson

I dis­cussed the ‘com­muters para­dox’ last year, not­ing that “a per­son with a one-hour com­mute has to earn 40 per­cent more money to be as sat­is­fied with life as someone who walks to the office”.

The Denomination Effect: Banknotes vs. Coins

The denom­in­a­tion effect is the phe­nomen­on whereby people spend coins faster than bank­notes: it shows that we are more will­ing (there are few­er psy­cho­lo­gic­al bar­ri­ers) to spend the same sum of money in coins than in ‘bills’.

It’s obvi­ous, but I like hav­ing these things ‘con­firmed’ and hav­ing a name to go with them.

Anoth­er exper­i­ment involved [NYU and Berke­ley Pro­fess­or of Mar­ket­ing Priya Raghubir] stand­ing out­side a gas sta­tion in Omaha. She would have people fill in a sur­vey about gas usage and then thanked them with either a $5 bill, five $1 bills or five $1 coins. People went into the store, and when they came out Raghu­bir asked them for their receipts. The ones with coins spent the most, people with dol­lar bills a little less. And people with one $5 bill kept that one in their pock­ets.

Raghu­bir wanted to see wheth­er that effect was par­tic­u­lar to Amer­ic­an cul­ture, so they ran the exper­i­ment over­seas. Giv­en a week’s salary in dif­fer­ent denom­in­a­tions, house­wives in China behaved the same way.

The art­icle sug­gests that there may be a way to exploit this in order to “get con­sumers going again”–I won­der how this can be exploited online?