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?