Tag Archives: negotiating

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.

 

Clarifying Questions Placate Detractors

Feeling misunderstood and as if we are not being carefully listened to is a reason why conflicts can turn ugly, suggests Psychology Today‘s Professor Todd Kashdan. To prevent ugly, unpleasant arguments (and to resolve uncomfortable negotiations) we should ask simple, clarifying questions:

If people show that they are curious and willing to learn more about someone else’s opposing view, this might be the key to diplomacy. That is, ask a single clarifying question about what another person’s view is about. […]

By merely asking for a single bit of information, the other person views us as more open-minded and warm. […] They view us as different from the typical person with a belief system that differs from their own. […] The other person feels as if we are paying attention and they don’t just feel good, they view us as a good person. […] When you show curiosity in what they care about, they show a greater willingness to gather additional information from you. In the end, they are more willing to negotiate and come to a compromise that benefits everyone.

Chris Yeh weighs in, saying that

Far too many in this day and age take a positional approach–establish your position, and advocate it as strongly as possible. But the positional approach is only optimal if the conflict or argument is truly a simple, zero-sum tug-of-war.

Far better to seek an understanding that lets you craft an outcome that maximizes overall utility. Even if you don’t get a significantly better deal, allowing the other part to come out ahead as well has major benefits for future interactions and your overall reputation.

Optimum Starting Prices for Negotiations and Auctions (and Why)

A high initial offer in negotiations is more likely to lead to a high final price, yet in auctions a low start price is more likely to lead to a high final price.

These are the findings of a recent study that attempted to find the optimal starting prices for negotiations and auctions.

In negotiations (where the number of actors is often predetermined), starting prices drive cognitive processes, leading individuals to selectively focus on information consistent with, and make valuations similar to, the starting value. Thus, starting high will often lead to ending high in negotiations. Conversely, in auctions (where the number of actors is determined during the course of the auction), low starting prices catalyze social processes that can lead to higher final prices: Low starting prices lower barriers to entry and increase the number of bidders; produce more sunk costs for early entrants; and lead participants to infer greater value from this increased bidding activity, resulting in herding behaviour.

As Mind Hacks summarises: negotiation relies heavily on the anchoring effect (of which there are “few psychological phenomena as robust”), whereas in auctions “price rise [is] driven by social competition and so starting with a low entry point encourages more people to join in; once someone has bid, they have made a commitment which is likely to encourage them to continue; and finally, more bids leads us to infer that the item has a higher value”.