What should your first offer be in a negotiation?
The question doubtless has led to sleepless nights for negotiators who understand that the first offer in a negotiation tends to have a strong anchoring effect on the haggling that may follow. Because even extreme offers can pull the discussion in their direction, the question of how high or low an opening offer to make is a critical one.
In addition to an offer’s size, its precision can have an anchoring effect as well. Specifically, all 49 studies on the topic have found that the more precise a number is, the stronger its anchoring effect will be, write Professor David D. Loschelder of Leuphana University of Lüneburg, Germany, and his colleagues in a new study. For example, a house with a precise listing price, such as $355,500, is likely to generate higher bids from potential buyers than a house with a less precise listing price, such as $356,000 or $354,000.
People tend to express offers as round numbers in negotiation, and they may be unaware of the potential anchoring benefits of more precise offers found in past research. On the online real estate site Zillow, for example, only 2% of sellers’ listing prices were specified to
the dollar place (such as $456,235), Professor Malia F. Mason of Columbia University and her colleagues found in
a 2013 study.
People may be unaware of the potential anchoring benefits of more precise anchors.
But consider that almost all of the 49 studies demonstrating the superior anchoring effects of precise offers were conducted with amateur negotiators—people with no or little insider knowledge about appropriate pricing in the industry they were being asked about. When negotiating in their field, are experts swayed by precise anchors in the same manner as amateurs? Given that we often negotiate with experts, such as real estate agents and car salespeople, it’s an important question to ask and one that Loschelder and his colleagues examined in their new study.
Amateurs and experts
In their research, Loschelder and his team compared how amateurs and experts in different contexts reacted to opening offers of varying precision.
In one online experiment, for example, the participants were 230 individuals who lacked professional negotiation experience and worked outside the field of real estate (the “amateurs”) and 223 real estate agents who had worked in the field for an average of about 17 years and negotiated the sale of 20 houses, on average, per year (the “experts”).
The amateurs and the experts were individually presented with a detailed real estate listing for a house. They were also given the home’s listing price, which varied across participants in its degree of precision, ranging from the imprecise (€980,000) to the extremely precise (€978,781.63 or €981,218.37, figures below and above the imprecise listing price). Then the participants were asked to make a counteroffer to the seller and to state the highest price they were willing to pay for the house.
As in past studies, the more precise the offer they saw, the more the amateurs were willing to pay and the higher their counteroffer was. By contrast, an offer’s precision anchored the experts only up to a point. Once an offer was so precise that it included cents (for example, €978,218.30), their willingness to pay and counteroffers began to drop. Similarly, in a follow-up experiment, real estate agents made significantly higher counteroffers when presented with a moderately precise offer for a chemical plant (€25,750,000) than when given a highly precise offer for the plant (€25,748,637).
In other experiments, the researchers found that the strategy of making very precise offers also backfired when car salespeople and human-resource professionals were preparing to negotiate in their field of expertise. However, when a seller gave a specific reason to explain the precision of an offer—for example, “correcting” an expert appraisal of a used car with additional information on the car’s value—the experts were once again anchored by precision and forfeited value to the seller.
Tempering your precision
Why were amateurs more susceptible than experts to being anchored by precise offers? Amateurs tended to view an offer’s precision as a sign that the price setter was confident and competent. By contrast, because of their experience and knowledge, experts did not make these competence inferences unless the seller explicitly justified the precision.
Overall, the results suggest that when dealing with someone who is a relative amateur in the negotiating context, you may gain an edge by making a precise first offer. However, when negotiating with experts, you would be wise to round up your offer unless you have a strong explanation for why it is precise.
Source: “The Too-Much-Precision Effect: When and Why Precise Anchors Backfire with Experts,” by David D. Loschelder, Malte Friese, Michael Schaerer, and Adam D. Galinsky, Psychological Science, 2016.