When to Make the First Offer in Negotiations

In luxury real estate, sellers and their brokers sometimes make the unusual decision not to set an asking price but instead to ask buyers to make the opening bid, writes Katherine Clarke in the Wall Street Journal.

Given traditional advice on when to make the first offer in negotiations, this strategy may seem ill advised. Abundant research on the anchoring effect, documented by Amos Tversky and Daniel Kahneman, shows that the first number suggested in a negotiation has a strong impact on the final agreement. For this reason, negotiators are often advised to try to gain an advantage by making the first offer.

In fact, the answer to the question of whether to make the first offer is more nuanced than a clear yes or no. An in-depth analysis of your bargaining position and that of the other party is needed to determine the best course of action, given your situation.

Your BATNA and Beyond

When determining when to make the first offer in negotiations, begin by assessing your best alternative to a negotiated agreement, or BATNA (what you will do if you can’t reach a deal); your target, or aspiration; and your reservation price—your point of indifference between accepting a deal and pursuing your BATNA. Next, you will need to estimate your counterpart’s BATNA, target, and reservation price. That analysis will help you identify the zone of possible agreement, or ZOPA—the range of options that both sides would find acceptable.

When you believe you know more about the ZOPA than the other party, you generally should feel comfortable using the anchoring effect of an aggressive offer near the top of the ZOPA. This is typically the case for sellers who know a great deal about what they’re selling—and likely more than the buyer does. The longtime owner of a house generally should feel comfortable advertising an ambitious list price, for example.

By contrast, when your counterpart knows more about the ZOPA than you do, it will be difficult for you to drop an effective anchor. A job candidate, for instance, may be in the dark about the possible salary range for a given job relative to the recruiter. Because of the risk of asking for too little, the candidate might be wise to let the recruiter make a salary offer.

Similarly, homeowners may choose not to name their price because they simply aren’t sure of their property’s market value. Consider the case of an unfinished home that will take time to complete. To allow the asking price to fluctuate with the market over time, the seller might not state a price up front.

Advice for Sellers: Capitalize on Uniqueness and Scarcity

When a commodity is unique or offers special value to certain bidders, sellers may also see an advantage in allowing buyers to make the first offer.

In auction lingo, an item that offers different value to different bidders is known as a private-value asset. One bidder might want to procure the painting you’re selling as an investment piece, while another bidder may covet it because a distant relative was the artist. By contrast, common-value assets, such as an oil lease or a condo in a large new building, have more or less equal value to all bidders—the price may fluctuate over time, but it’s worth the same amount to all potential buyers in the present.

When a private-value asset is for sale, one or more bidders may be willing to pay much more than others would. If that’s a possibility, you might decide to leave the price unspecified and hope you can find at least one, and preferably several, of these bidders.

Relatedly, according to the scarcity principle, people are willing to pay more for rare items, such as a unique property or lunch with a celebrity auctioned off for charity. In his book Influence: Science and Practice, Robert B. Cialdini explains that “opportunities seem more valuable to us when they are less available.” Why? Because potential losses tend to loom larger in our minds than potential gains, we can feel highly motivated, even desperate, to avoid losing something we might not ever find again. Buyers may be tempted to bid high for scarce items, so sellers might want to let them open first.

Advice for Buyers: Consider Several Options

Turning to the buyer side, when a seller asks you to bid first or is cagey about disclosing the price, they may be hoping that emotion will drive your decision making. In such situations, you could end up overpaying and regretting your purchase.

To make more rational decisions, try to fall in love with several properties (or whatever commodity you’re shopping for) rather than just one, advises Harvard Business School Professor Max H. Bazerman. When you have one or two appealing BATNAs to turn to, you’ll be less tempted to overbid in the current negotiation. Moreover, if you believe the seller is less certain than you are about an item’s market value, try to persuade them to drop the first anchor, as it could be in your favor.

What other advice would you give on when to make the first offer in negotiations?