In negotiation, the person who makes the first offer often comes out ahead, price-wise. Why are first offers so influential? In their groundbreaking research from the 1970s, psychologists Daniel Kahneman and Amos Tversky showed that when we’re asked to make a judgment in the face of uncertainty, we are easily swayed by the first figure introduced into the conversation, however irrelevant or outrageous it may seem. The anchoring heuristic highlights the importance of crafting our first offers with care. Two studies reveal somewhat surprising ways to do so.
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How Precise Should You Be?
When making an opening offer in a negotiation, our main focus is typically how high or low it should be: a $350,000 sale price for our house, or maybe $360,000? By contrast, the precision of that offer—that is, should the listing price be $350,000, $349,900, or maybe $349,999?—is often an afterthought.
The fewer zeros there are at the end of your price offer, the more precise the offer is said to be. And, generally speaking, the more precise your offer is, the stronger an anchor it will be, researchers have found. Precise offers convey that you have a solid sense of the commodity’s value and may be inflexible on price. Counterparts tend to cave in accordingly.
There’s a catch, though. “Prior studies that have demonstrated a precision advantage have operated under the premise that the involved parties have already decided to negotiate,” write researcher Alice J. Lee and her colleagues in a study on the topic. By contrast, in many real-world negotiations, “first offers are presented before the involved parties begin to negotiate,” as in the case of homes or used cars.
In their research, Lee and her team found that when such offers are very precise, they risk scaring away potential negotiators by conveying inflexibility. Data from the real estate service Redfin showed that the more precise the listing price on a property was, the more likely the seller was to have relisted the property at a lower price due to lack of interest.
Thus, a round first offer may be more likely to entice bidders. But once a negotiation is in progress, due to the anchoring heuristic, you might benefit from making more precise counteroffers.
Should You Try a “Phantom Anchor”?
Another factor to consider when using the anchoring heuristic is whether to drop a so-called phantom anchor—a figure that you’re not actually offering. Here’s an example from a car seller: “I was going to ask $8,000 for the car, but I can let you have it for $6,500.” The phantom anchor, $8,000, is not an actual offer but may carry the weight of one.
In their research, researchers Nazli Bhatia and Brian C. Gunia found that accompanying an offer with a phantom anchor can lend an advantage in negotiation. Across several experiments, negotiators who framed their offer relative to a phantom anchor (for example, $10,000 rather than $11,000 for a car) achieved better outcomes than negotiators who made the same offer ($10,000) without referencing a phantom anchor. Even though it’s not on the table, the phantom anchor pulls bidders’ expectations in its direction.
This benefit had a downside: Negotiators perceived those who dropped phantom anchors to be more manipulative than those who did not. Such perceptions could deter you from building trust and creating value.
You may be able to avoid this pitfall by supporting the phantom anchor with an objective standard. In another experiment, Bhatia and Gunia asked participants to imagine they were being considered for a job and told them that similar positions had been advertised at an annual salary of about $55,000. Those in the phantom-anchor condition were then told, “We were planning on offering you $55,000, but we can do $60,000.” Those in the control condition were simply told, “We can offer you $60,000.” This time, the phantom anchor was viewed as less manipulative but was just as effective.
Overall, due to the anchoring effect, suggesting that you are opening with a concession can help you get a better deal in negotiation. But keep your own ethical code at the forefront, and be aware that your negotiation behavior could incur your counterpart’s distrust.
More Advice on the Anchoring Heuristic
- Who should go first? When you’re sure you know more than your counterpart does about the value of the commodity up for sale, you would be wise to make the first offer. However, when you are uncertain of an item’s value, you may want to let the other party go first.
- How ambitious should your offer be? Aim to make a first offer that’s assertive but not unreasonable. Start by estimating the size of the zone of possible agreement, or ZOPA—that is, the overlap between offers that both parties would likely find to be acceptable. Then make an offer at the far end of the ZOPA that favors you.
- What if they make the first offer? Avoid being unduly anchored by a counterpart’s offer by keeping your goals and outside alternatives at the forefront of your mind. You might choose to ignore the other side’s anchor entirely and present your intended first offer as your counteroffer.
How has the anchoring heuristic come into play in your negotiations? Leave a comment below, and let’s discuss.
Claim your FREE copy: Negotiation Skills
Build powerful negotiation skills and become a better dealmaker and leader. Download our FREE special report, Negotiation Skills: Negotiation Strategies and Negotiation Techniques to Help You Become a Better Negotiator, from the Program on Negotiation at Harvard Law School.
This is very helpful.. it is often taught that the party who makes the first offer is at a disadvantage. But the approach you recommend is very thoughtful and may indeed build credibility. The “precise price” discussion is very valid.