It may be the most burning question in business negotiations: Should you make the first offer?
Traditionally, negotiators were advised to wait for the other side to make a first offer. According to this reasoning, the other side’s offer gives you valuable information about his goals and alternatives.
More recently, however, research on the anchoring bias has shown that the costs of waiting for the other side’s offer often outweigh these benefits.
What is the anchoring bias? Armed with a better sense of the anchoring bias, you can make better first offers and respond effectively to your counterparts’ first offers in business negotiation.
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What is the Anchoring Bias?
Abundant research evidence shows that the party who makes the first offer in a negotiation gains an advantage. The first offer “anchors” the conversation, influencing the exchange of offers that follows—even if the anchor is arbitrary. What is anchoring in negotiation? For example, the list price on a home tends to strongly anchor how potential buyers and their agents view the property and the counteroffers they extend.
The anchoring bias is considered a “bias” because it distorts our judgment. This is especially the case when the bargaining zone is unclear.
Another example of the anchoring bias, imagine you enter a job interview hoping for a salary of $75,000. If the interviewer offers you only $45,000, you may find yourself making a counteroffer of $55,000—far less than the $80,000 you would have suggested yourself. Due to the other side’s effective anchor, the possibilities for agreement have narrowed in your mind.
Should You Drop an Anchor?
Careful preparation will help you decide whether you might be able to drop an anchor successfully. In particular, you need to assess your best alternative to a negotiated agreement, or BATNA; your target; and your reservation price—your point of indifference between accepting a deal and pursuing your BATNA. Next, estimate your counterpart’s BATNA, target, and reservation price. This analysis will tell you how much you know about the zone of possible agreement, or ZOPA—the range of options that would be acceptable to both sides.
Should you make the first offer? That depends on two factors: your knowledge of the ZOPA and your assessment of the other side’s knowledge of the ZOPA. Four different scenarios are possible:
- The other party knows more about the ZOPA than you do. When it seems likely that the other party knows more than you do about the size of the ZOPA, you will have trouble anchoring effectively. In the typical job negotiation, for example, the interviewer knows more about the possible salary range than the job candidate does. Before dropping an anchor in such situations, arm yourself with as much information as you can.
- Both sides have a strong sense of the ZOPA. This is typically the case in long-standing relationships between suppliers and customers with open books. If each side is aware of the other side’s profit margins, anchors won’t have much effect. Instead, negotiators are likely to focus on whether they feel they are being treated fairly.
- Neither side knows much about the ZOPA. Consider this anchoring bias example: a consulting firm was interviewing a candidate to do hourly, high-level work in an emerging field. The interviewer thought that $120 per hour sounded about right, but she wasn’t sure, so she asked the candidate to name his price. The candidate suggested $60 per hour, and they settled on $50. To his detriment, the candidate unwittingly dropped a very low anchor. The lesson? Although you can make an effective first offer when neither side knows much about the ZOPA, you run the risk of being too concessionary or too demanding.
- You know more about the ZOPA than the other party does. This is often the case when you are offering or selling an asset (such as a job, a house, or a car) about which you know a great deal. In such cases, you should take advantage of your superior knowledge and make an aggressive first offer with confidence.
How to Avoid Being Anchored
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, a strong BATNA will give you the confidence you need to reject extreme anchors and, if no agreement seems possible, move on to your next-best option.
What examples of the anchoring bias have you encountered in your business negotiations?