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”.