In dealmaking, a certain question often looms large: Should you or shouldn’t you make the first offer? Traditionally, negotiation experts advise us to sit tight and wait for the other side to float the first number. This negotiation advice is grounded in the fact that the other party’s offer may shed light on his goals and alternatives and better equip you to meet them.
Yet more recent negotiation research on the anchoring effect has added nuance to the conventional wisdom about when to make the first offer in a negotiation.
When engaged in claiming value in negotiation, our perceptions of a particular offer’s value are significantly influenced by any relevant number or anchor, that is introduced. Especially when ambiguity and uncertainty are high, the first offer that a party puts forth will have a strong anchoring effect on the negotiation that follows. Even when we know a particular anchor should not affect our judgment, we have difficulty resisting its influence.
In their classic demonstration of the anchoring effect from the 1970s, psychologists Amos Tversky and Daniel Kahneman asked study participants to estimate the percentage of African countries that belong to the United Nations. Each participant was given a random number, determined by the spin of a roulette wheel, as a starting point. They were then asked to guess whether the actual quantity fell above or below that random value and make their best estimate of that actual quantity. Despite the fact that the participants knew their starting point was completely arbitrary, it significantly affected their estimates. Even when the researchers paid participants for their accuracy, the anchoring effect continued to powerfully affect their judgments.
Negotiation Advice: Even Experts Who Have Access to Ample Data Can Fall Victim to the Anchoring Effect in Negotiation and Dealmaking.
In one research study, professors Greg Northcraft (University of Illinois) and Margaret Neale (Stanford University) provided real-estate agents with a great deal of information about a house that was for sale. The agents also toured the house and were given data about comparable properties. The agents were given randomly chosen list prices—in essence, the seller’s first offer—for the house ranging from $119,000 to $149,000. The agents then were asked to name an appropriate list price for the house, estimate the house’s appraisal value, state how much a buyer should reasonably pay for the house, and name the lowest offer they would accept for the house if they were the seller.
The agents insisted that the random list price they were given did not influence their evaluations, yet their responses suggested that the anchoring effect came into play: Agents who were given a higher list price believed the house was worth more than did agents who were given a lower list price.
Research on the anchoring effect suggests that the party who makes the first offer in a negotiation can gain a powerful advantage by steering talks in her favor. But that doesn’t mean that it’s always wise to make the first offer, as the anchoring effect could work against you if you choose the wrong anchor. Instead, the decision of whether to “drop an anchor” should be based primarily on two factors: your knowledge of the zone of possible agreement, or ZOPA—the range of possible outcomes that each side will find acceptable—and your assessment of the other side’s knowledge of the ZOPA.
When it seems likely that the other party is better informed about the parameters of the ZOPA than you are, you will have trouble putting the anchoring effect to use. 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, you should arm yourself with as much information as you can.
By contrast, when both sides have a strong sense of the ZOPA, the anchoring effect will be difficult to deploy. Take the case of a long-standing relationship between a supplier and customer with open books. Because each side is already aware of the other side’s profit margins, negotiators will be more resistant to being anchored.
What about when neither side knows much about the ZOPA? In this case, you risk being either too concessionary or too demanding. Dropping the first anchor can lead to dissatisfaction when you find yourself closing the deal in such situations.
Negotiation advice: Finally, when you know more about the ZOPA than the other party does, as when you are offering or selling an asset (such as a job, a house, or a car) about which you know a great deal, you should take advantage of your superior knowledge and the anchoring effect, and make an aggressive first offer with confidence.