On July 11, 2000, U.S. president Bill Clinton welcomed Israeli Prime Minister Ehud Barak and Palestinian Authority Chairman Yasser Arafat to a summit at Camp David aimed at resolving the Israeli-Palestinian conflict once and for all. The summit covered various contentious issues, including territory, settlements, security, and the status of refugees.
After about two weeks, on July 25, the talks collapsed. Arafat was widely blamed for refusing to accept what many viewed to be a generous offer from Barak, but more nuanced explanations have been given for the summit’s failure.
For one, the parties made their initial offers early in the negotiation process, before they had a chance to fully explore each other’s underlying interests, write Marwan Sinaceur of INSEAD and his coauthors in a new study published in the Personality and Social Psychology Bulletin. “Putting early offers on the table appears to have backfired” in this case, preventing the parties from identifying creative options, writes the research team.
In negotiation, a critical question is whether you should make the first offer or let your counterpart do so. Ample research suggests that in distributive negotiations, where parties are competing over a fixed pie and have little opportunity to make trades across issues to create value, the advantage does often go to the party who makes the first offer.
Meanwhile, the question of when to make the first offer and how its timing might affect parties’ outcomes has been unexplored. Until now, we haven’t known how first offers affect outcomes in complex, multi-issue negotiations, where parties can potentially trade on their different preferences.
Sinaceur and colleagues examined these questions in three experiments. Their results suggest the importance of carefully timing your first offer to maximize gains for everyone involved.
Anchoring too early?
The anchoring effect is the most frequently cited reason for making the first offer in negotiation. The party who makes the first offer typically anchors the discussion that follows, research has shown—even if the anchor is arbitrary. The list price on a home, for example, tends to strongly anchor how potential buyers and their agents view the property and the counteroffers they extend.
More advice on first offers
- Aggressive first offers are generally effective, as long as they don’t seem absurd, research by Adam D. Galinsky of Columbia University suggests.
- For maximum effectiveness, focus on your target price—the agreement that would meet all your goals—when setting a first offer.
- If the other side makes a first offer that pleases you, maximize her satisfaction with the deal by asking for a concession. Research shows that negotiators tend to have regrets about offers that are accepted quickly.
- If you have trouble getting information about the ZOPA, or zone of possible agreement, consider making a “nonoffer offer”—that is, suggesting a reference point that avoids sounding like an extreme demand: “I may be mistaken, but I think the typical salary range for this type of work is about $100,000 to $120,000.”
Notably, first offers tend to anchor negotiators not only on a number but also on a limited set of issues. In a real estate negotiation, for example, the list price encompasses attributes of a home, such as its size, location, condition, and so on. Yet when parties immediately focus on haggling over the list price, as is typically the case, they may fail to consider other issues they might negotiate to create value, such as the closing date, financing, and upgrades.
Thus, it could be that early anchors are less effective than later ones. To test this theory, Sinaceur and his team paired up undergraduate business students and had them engage in a simulated purchasing negotiation. One played the representative of a company that was hoping to sell the red bananas it produced to a pharmaceutical company, represented by the other student, for use in a drug that could alleviate a global epidemic.
The parties had other underlying interests beyond sale price. The banana producer wanted to forge a long-term business relationship with the buyer and to alleviate an epidemic in its country with the drug. The pharmaceutical company wanted to produce the new drug as efficiently as possible to maximize the number of people cured. Therefore, the parties potentially could expand the discussion by negotiating issues such as quality checks of the bananas, access to the drug, and potential investment in the producer’s country.
One group of buyers was instructed not to make a first offer until the final five minutes of the 20-minute negotiating period. A second group of buyers was told to make the first offer during the first minute of the negotiation, and a third group of buyers was given no specific recommendation regarding first offers. First offers were not mentioned to those playing the role of seller.
The result? As in previous research, participants who made the first offer negotiated a more favorable price for themselves than did those who didn’t make the first offer, regardless of its timing.
More interestingly, in pairs in which the buyer made late first offers, final agreements included a wider variety of creative issues than did the agreements of pairs in which buyers made early first offers in control-group pairs. Pairs in which first offers were made late also were more adept at meeting each other’s underlying interests than the other two groups.
Why late anchors work
In two other experiments, the researchers used a different negotiation simulation with less obvious possibilities for value creation. Here again, pairs in which one of the parties made a late first offer were better at uncovering joint gains than were pairs in which one party made an early first offer. This was because pairs who exchanged offers later in the process shared more information than did pairs who started trading offers earlier.
To understand why, consider that we tend to enter negotiations—especially those with new counterparts—with a guarded, competitive mind-set. We stake out our positions and, because of a lack of trust, are reluctant to share information. As the negotiation unfolds, we become more trusting of our counterparts and more willing to share information about our interests and priorities. This allows us to engage in problem solving—using the information we glean to generate new possibilities.
Arming against anchors
The findings of this study suggest new advice for negotiators: to get more out of deals that involve multiple issues, avoid making the first offer until you feel comfortable with your counterpart and have had ample time to share information about your interests.
How can you convince the other party to hold off on dropping an early anchor? At the start of your talks, explain that you believe you will both end up with a better deal if you take time to explore each others’ interests and delay exchanging offers until later in the process. This doesn’t guarantee that you’ll be the first to make an offer, but it should at least improve the overall quality of your deal.
If the other side does make the first offer, how can you avoid being overly swayed by it? Base your counteroffer on the same information you would use to construct a first offer, namely your ideal outcome and your knowledge of the other party’s alternatives and likely reservation price. Ideally, you will have cultivated a strong BATNA, or best alternative to a negotiated agreement, that will give you the confidence you need to reject extreme anchors and, if no agreement seems possible, move on to your next-best option.
A caveat: The benefits of delaying first offers may not apply to single-issue negotiations in which parties have strong incentives to compete. In such situations, negotiators may have no motivation to share information, thus negating the value of late first offers.
3 takeaways about first offers
- First offers serve as potent anchors in all types of negotiations.
- Delaying the first offer until late in the process will generally benefit all parties involved in a multi-issue negotiation.
- To avoid being influenced by the other side’s anchor, stay focused on your goals and alternatives, and on their interests.