Aggressive First Offers: Helpful Notes

Research shows that how we perceive a particular offer’s value is highly influenced by any relevant number that enters the negotiation environment — an anchor.

The greater the ambiguity and uncertainty, the stronger the anchoring effect of the first offer, which will exert a strong pull throughout the rest of the negotiation. Researchers had real estate agents inspect a house and estimate its appraisal value and its purchase price

• then they manipulated the house’s list price, providing high and low anchors
• all of the agents’ estimates were influenced by the list price, even though they denied factoring the list price into their decisions
• when they explained the basis for their estimates, they cited features of the property that would justify those estimates

In another study, researchers sent customers to mechanics to obtain estimates on the value of a car

• after the customer offered his own opinion of the car’s value, he asked the mechanic for an estimate
• half the mechanics were given a low anchor and half were given a high anchor
• the mechanics estimated the car to be worth a thousand dollars more when they were given the high-anchor value

A Northwestern business law school professor explained the phenomenon this way

• items being negotiated have 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
• 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 on a car’s worn belts and ailing clutch rather than its low mileage and pristine interior

Making the first offer anchors the negotiation in favor of the offeror

• the author of the article from which these insights were gleaned found that when a seller makes the first offer, the final settlement price tends to be higher than when the buyer makes the first offer
• 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 predict final settlement prices better than subsequent concessionary behaviors do

How extreme should your first offer be?

• this author’s research suggests that first offers should be quite aggressive but not absurdly so
• the fear that an aggressive first offer will scare or annoy the other side and perhaps even cause him to walk away in disgust is typically exaggerated
• most negotiators make first offers that are not aggressive enough
• a nonaggressive first offer requires small concessions or a decision to stand by the original demand
• 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 your opponent is able to “extract” concessions from you
• in that case, you’ll not only get a better outcome, but you’ll also increase the other side’s satisfaction

From “Should You Make the First Offer?” by Adam D. Galinsky, an assistant professor at Northwestern University’s Kellogg Graduate School of Management, in Evanston, Illinois. Tags: Deal Making, Mediation, Negotiation, Negotiation Strategy and Tactics, Settlement, Social Psychology

                       

Victoria Pynchon

Attorney-mediator Victoria Pynchon is a panelist with ADR Services, Inc. Ms. Pynchon was awarded her LL.M Degree in Dispute Resolution from the Straus Institute in May of 2006, after 25 years of complex commercial litigation practice, with sub-specialties in intellectual property, securities fraud, antitrust, insurance coverage, consumer class actions and all… MORE >