Should You Make the First Offer? According to conventional wisdom, no. But new research on the anchoring effect suggests that the best strategy is often to speak up first. BY ADAM D. GALINSKY WHETHER NEGOTIATORS ARE BIDDING ON A FIRM, seeking agreement on a compensation Package, or bargaining over a used car, someone has to make the first offer. Should it be you, or should you wait to hear what others have to say? How will the first offer influence the negotiation process and any final agreement? The question of whether to make the opening move plagues negotiators. Uncertainty compounds the issue. IF you lack reliable information about your opponent's true bargaining position, you'll be unsure about what offer she will find acceptable and whether she'll walk away from the bargaining table. Furthermore, it’s possible that your opponent will offer up misleading information in an attempt to get a bargaining advantage. Because of the inherent ambiguity of most negotiations, some experts suggest that you should wait for the other side to speak first. By receiving the opening offer, the argument goes, you'll gain valuable information about your opponent's bargaining position and clues about acceptable agreements. This advice makes intuitive sense, but it fails to account for the powerful effect that first offers have on the way people think about the negotiation process. Substantial psychological research suggests that, more often than not, negotiators who make first offers come out ahead. In this article, | explain when and how first offers affect final outcomes and advise you on how to make and receive opening offers. The dramatic effect of anchors Research into human judgment has found that how we perceive a particular offer’s value is highly influenced by any relevant number that enters the negotiation environment. Because they pull judgments toward themselves, these numerical values are known as anchors. In situations of great ambiguity and uncertainty, first offers have a strong anchoring effect - they exert a strong pull through- out the rest of the negotiation. Even when people know that a particular anchor should not influence their judgments, they are often incapable of resisting its influence. As a result, they insufficiently adjust their valuations away from the anchor. We might expect experts to be immune to the anchor- ing effect. Real estate agents, for example, should be able to resist the anchoring effects of a property's list price be- cause of their presumed skill at estimating property values. Testing this theory, researchers Greg Northcraft and Margaret Neale had real estate agents inspect a house and estimate its appraisal value and its purchase price. Northcraft and Neale manipulated the house’s list price, providing high and low anchors. All of the agents’ estimates were influenced by the list price, yet they denied factoring the list price into their decisions, instead citing features of the property that would justify their estimates. Page 1 of 9In another study, Thomas Mussweiler of the Institute of Psychology at the University of Warzburg, in Wurzburg, Germany, and his colleagues had customers approach German mechanics—individuals expected to be knowledgeable about the true value of cars—with a used car that needed numerous repairs. After offering their own opinion of the car’s value, the customers asked the mechanics for an estimate. Half the mechanics were given a low anchor; the customer stated, “I think that the car should sell for about DM 2,800.” The other half were given a high anchor: “I think that the car should sell for about DM 5,000.” The mechanics estimated the car to be worth DM 1,000 more when they were given the high- anchor value! As this research makes clear, anchors affect the judgment of even those who think they are immune to such influence. But why? The answer lies in the fact that 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. Hence, a high list price directed real estate agents’ attention to the house's positive features (such as spacious rooms or a new roof) while pushing negative features (such as a small yard or an old furnace) to the back recesses of their minds. Similarly, a low anchor led mechanics to focus ona car’s worn belts and ailing clutch rather than its low mileage and pristine interior. When you should make the first offer Anchoring research helps clarify the question of whether to make the first offer in a negotiation: by making the first offer, you will anchor the negotiation in your favor. In fact, Mussweiler and | have shown that making the first offer affords a bargaining advantage. In our studies, we found that the final outcome of a negotiation is affected by whether the buyer or the seller makes the first offer. Specifically, when a seller makes the first offer, the final settlement price tends to be higher than when the buyer makes the first offer. My own research also shows that 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. For example, recruiters and employers typically have more information than job candidates do; likewise, buyers and sellers represented by a real estate agent often are privy to more information than unrepresented buyers and sellers are. This doesn’t mean you should sit back and let the other side make the first offer. Rather, this is your opportunity to level the playing field by gathering more information about the Page 2 0f9item, the industry, or your opponent's alternatives to the negotiation. The well-prepared negotiator will feel confident about making the first offer and anchoring the negotiation in his favor. Don't be afraid to be aggressive 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 fioffers that are not aggressive enough. An aggressive first offer can work in your favor for several reasons. Take the perspective of the seller: more extreme first offers lead to higher final settlements. For example, higher listing prices lead to higher final sale prices in real estate transactions because, as we've seen, high-anchor offers lead buyers to focus on a negotiated item’s positive attributes. In addition, an aggressive first offer allows you to offer concessions and still reach an agreement that’s much better than your alternatives. In contrast, a nonaggressive first offer leaves you with two unappealing options: make small concessions or stand by your demands. One of the best predictors of negotiator satisfaction with an outcome is the number and size of the concessions extracted from an opponent. By making an aggressive first offer and giving your opponent the opportunity to “extract” concessions from you, you'll not only get a better outcome, but you'll also increase the other side's satisfaction. Of course, it’s important that your opening offer isn’t absurdly aggressive. The fi offer provides preliminary insight into the bargaining zone and range of possible agreements. An absurd offer can lead the receiver to believe that no agreement exists that will be acceptable to you both and therefore can cause her to walk away from the negotiation. Focus on your target price When constructing an aggressive (but not absurdly aggressive) first offer, there are generally two values on which you should focus. First, consider your alternatives to agreement and create a reservation price—a specific value at which you'd prefer to walk away rather than reach a deal. Now you'll be prepared to accept any agreement that exceeds your reservation price and reject any value that falls below it. Second, determine your ideal outcome, or target price— the agreements or values that would fulfill all of your negotiation hopes and desires. Knowledge of your reservation price is crucial, but it’s your target price that you should pay attention to when constructing a first offer. Mussweiler, my colleague Victoria Husted Medvec, and | have found that negotiators who focus on their target prices make more aggressive first offers and ultimately reach more profitable agreements than those who do not. Page 3 of 9How can you ensure that your first offer is not so aggressive that it drives your opponent away? By focusing on your opponent's alternatives to agreement and trying to determine his reservation price (while also being cognizant of market trends). Researchers John Oesch and Glenn Whyte found that the best first offers are those that fall outside the bargaining zone—beyond your opponent's reservation price—but not so far outside as to be discounted or ignored by the recipient of the first offer. A caveat: negotiators who focus too much on their ideal outcomes sometimes curse themselves by rejecting profit- able agreements that surpass their alternatives. The lesson? Focus on your target price and make an aggressive first of- fer, but be willing to concede so you avoid rejecting favor- able agreements. In doing so, you'l still get a profitable deal, and the other side will be pleased with the outcome. Protect yourself against a first offer You may not always have the opportunity to make the first offer. How can you protect yourself from the anchoring effects of someone else’s offer? Many of the strategies out- lined above can keep you from being anchored by your opponent's first offer when making. your counteroffer. Specifically, your counteroffer should be based upon the same information you would use to construct a first offer: your ideal outcome and your ‘opponent's alternatives and probable reservation price. You might also try combining an aggressive counteroffer with a joke that will not only lighten the mood but discount the other side’s anchor. Whether you're making the first offer or the first counter- offer, an awareness of your aspirations and the other side’s limits can guide you toward a profit, outcome. What should you do if your opponent's first offer is close to your ideal—accept the offer and quickly finish off the negotiation, or raise your expectations and keep bar- gaining? My own research shows that if you immediately accept your opponent's first offer, she will likely be filled with regret. Despite not having had to make any concessions, your opponent will likely be beset with “if only” thoughts ranging from “| should have made a more extreme first offer” to “Maybe the item | purchased is suspect.” Remember that you want to reach an agreement that's profitable to you and that satisfies the other side. A satisfied opponent will be more likely to live up to the terms of the agreement and less likely to seek future con- cessions or revenge. So what should you do when you like your opponent's first offer? Demand concessions! You'll not only achieve a more advantageous outcome for your- self, but you'll also increase your opponent's satisfaction. eRENDEHK Page 4 of 9CONSIDER THESE FACTORS BEFORE MAKING THE FIRST OFFER September 1, 2006 The Business Journal Should you make the first offer, or get your counterpart to take the first step? In many negotiations, this can be the most critical strategic decision you make. Early in my career, | heard that you should never make the first offer. Frankly, this is unrealistic. Sometimes, this decision is out of your control. If you're selling your house, tradition dictates that sellers make the first offer. If you decide not to make it, you might be waiting a long time to sell. So, how should you decide? Weigh its advantages and disadvantages. Advantages include: ‘* Setting expectations. First offers, like first impressions, have a large impact on the receiving party. + Eliciting a genuine reaction. If your counterpart says your initial offer "sounds reasonable," it may be your first and last offer. + Strategic advantages, like your leverage is getting weaker by the day. proportionately Of course, the disadvantages may outweigh the advantages. Disadvantages include: * You lack sufficient information to start. (You just invented a new device and have no idea what a buyer might pay.) ‘+ Providing the other side with strategic information. (Your counterpart may get a sense of your weak leverage if you start.) * Bracketing. (The party going second usually creates the center of the two parties’ initial moves -- which often is viewed as inherently reasonable). If | start at 1 and you start at 10, going second you create the midpoint at 5.5. "Wait," you might say, "these factors sound good. But I'm still not sure what to do." Fair enough. Here are three circumstances where you should strongly consider making the first offer: 1. Situations involving sophisticated parties with substantial access to information. It often makes sense to make first offers in situations with equally knowledgeable sophisticated parties on both sides who have thoroughly researched each side's goals, interests, expectations, leverage and standards. When both sides fully understand the leverage equation and the independent standards involved, the range of mutually beneficial options tends to be more limited. Page 5 of 9The downside of making a first offer here -- lack of information and providing information to the other side ~ is relatively minimal. The upside — setting expectations and controlling the offer-concession dynamic -- often outweighs it One example might be a merger where each company already has thoroughly investigated the other's financial and strategic position. 2. Situations involving complex non-price issues and technically detailed agreements. Parties often find it advantageous to make first offers when negotiating complex non-price issues in which the initial offer includes a detailed written document or proposal If you lease commercial office space, you will benefit by making a first offer that includes your "standard" lease. You want your document, not the lessee's, to be the working draft of the agreement. 3. Situations where you have more information, defined standards and strong leverage. Finally, seriously consider making the first offer when you have substantially more information than the other side, enjoy strong leverage, and want to signal intransigence on certain issues, based on specific standards. Prices listed by retail stores and hotels fall into this category. Of course, even after evaluating these factors, you still might be unsure whether to start. If so, don't. Your strategic gut likely is telling you that you don’t have sufficient information to begin. If that's true, remember: When in doubt, don't start out. eAEND EAE Page 6 of 9HOW TO DEAL WITH UNREALISTIC OFFERS? By: Jens Thang We do get unrealistic offers from the other party. If you are the seller, your buyer will offer a price that is way too low your expectation. If you are the buyer, your seller will probably try to sell you at a price that is totally out of your range. You start to get offended by the outrageous offer the other party shoots. How do you deal with this? We must learn that by getting angry with what the other party offers is not worth it. It will affect the relationship you have with him and future dealings. You want to still preserve the good relationship with him. Separate the person from his proposal. It is not the person you disagree with. It is his proposal that you do not agree. Seeing the person and the proposal as two separate entities will help you deal better with the other party. This is what you can do: 1) Call out the tactic By calling out the tactic, you can be sure that the other party will start to become defensive. “| was hoping that we have a healthy dealing here but the extreme offer tactic that you are using just upsets me. It sounds like you are not interested in closing this deal.” 2) Ask for justification Always ask for justification! Even if they offer something that is within your range, proceed to ask for justification. When people have to justify their own stand, they start to examine their own offer. Sometimes, you can get them to talk themselves out of their initial offer. “How did you come to this figure?” “Is there a reason why you are offering this?” 3) Flinch! Show that you are surprised by his offer. The other party might sometimes be ashamed by his outrageous offer. You will know that he is ashamed when he starts to retaliate quickly by saying “Oh...so what do you offer? Give me a good one? | will see if | can adjust my offer.” By saying this, the other party has given away his game. It shows that he does not find his own offer convincing enough since he is so willing to adjust his offer. You will have to play his game. The other party is trying to anchor you. Be very aware of this. Let them know that they have to adjust their expectation in order to close the deal with you. Make relationship the most important factor in your negotiations. END EAH Page 7 of 9FRAMING - AN IMPORTANT NEGOTIATION TOOL Framing has become a key variable in the negotiation equation; it is unfortunately poorly understood by many negotiators. The use of framing dates back to the time of Aristotle when he used framing very effectively to portray murdering villains as laudable patriots and thus achieve their acquittal DEFINITION * A frame offers perspective by managing the alignment of the observer in relation to an issue, * A frame directs the observer to focus on a feature of an issue within the frame and to disregard other features of the same issue, which fall outside this frame. * A frame influences subsequent judgment in that it organizes and tailors information to fit into it. It therefore not only contains, but also constrains. We often use framing when we develop a rationale why we should do something or acquire a certain product or service. Take the example of a person who enters an audio-visual outlet to decide whether he or she should purchase a surround sound system (frame: surround sound system vs. no surround sound system) and ends up buying an expensive system due to one of the following forms of framing: © Reframing * Focus frame * Contrast frame Changing the frame from Positive to negative strongly influenced the way they perceived the problem — saving lives or not losing them. Given our positive bias as humans we overwhelmingly expect good things to occur. Negative information is more persuasive as it does not confirm these positive expectations and therefore tends to jolt us out of our comfort zones. Furthermore, we also tend to more intensely examine information which does not confirm our expectations and to ascribe extra weight to such conflicting information during our decision-making process. Although frames can be used for positive reasons, they undoubtedly can also be used for negative, manipulative reasons. Negative, manipulative frames can be countered by: * Recording the decision with vs. between the issues, asking whether those are the real issues and then reframing; * Asking what other frames could be appropriate when an open-and-shut decision is suggested (Is this truly such a simple decision, or is it made to look this way by the current frame?); Page 8 of 9* Never allow ourselves to forget that we are in charge of our frames, by frequently asking “What is important?” and then acting accordingly; ‘Asking what the agenda of a person is when that person stands to benefit from our compliance, and then countering with an alternate frame; and Always remembering that anything we see or hear on TV, radio, the web or in print has been framed. + eEND EHH Page 9 of 9