Imagine that you’re up for a new job that you’d like very much. At the end of a long hiring process, the HR manager asks you to name your price. You propose a salary that you believe to be ambitious, expecting some haggling to follow. Instead, the HR manager smiles and holds out her hand to seal the deal. Immediately sensing that you asked for too little, you feel deflated and undervalued even before your first day at work.
In negotiation, we’re often excited to close a deal. But at times, the fact that we’ve “won” a prize means that we’ve become the latest victim of the winner’s curse. Fortunately, there are steps you can take to avoid the winner’s curse in negotiations, auctions, and “negotiauctions” (negotiation-auction hybrids).
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What Is the Winner’s Curse?
In negotiation, the winner’s curse occurs when we set our goals too low. “The winner’s curse occurs when a negotiator makes an offer that is immediately accepted by the other party,” writes Kellogg School of Management professor Leigh Thompson in her book The Mind and Heart of the Negotiator.
More specifically, negotiators can fall prey to the winner’s curse when they overbid due to their failure to “consider the information advantage of the other party,” write Harvard Business School professors Deepak Malhotra and Max H. Bazerman in their book Negotiation Genius: How to Overcome Obstacles and Achieve Brilliant Results at the Bargaining Table and Beyond (Bantam, 2007). That is, we may fail to consider that the other party is most likely to accept our offer when we have offered too much (or asked for too little), note Malhotra and Bazerman.
In auctions with multiple bidders and in negotiauctions, the winner’s curse arises when a winning bidder’s assessment of the value of an item is higher than that of other bidders, writes Harvard Business School and Harvard Law School professor Guhan Subramanian in his book Dealmaking: The New Strategy of Negotiauctions (W.W. Norton, 2011). If a room full of people is bidding for a jar of coins of unknown value, for instance, the average of all of their bids is likely to be closest to the coins’ actual value, research shows. Thus, the person who makes the highest bid likely will have paid too much—and may end up feeling “cursed” and regretful.
Avoiding the Winner’s Curse
How can you avoid being the next victim of the winner’s curse? Add the following negotiation skills from the experts to your toolkit:
- In negotiations, anticipate how you’ll feel if your offer is immediately accepted. People who fall prey to the winner’s curse in a one-on-one negotiation typically are surprised when their counterpart quickly accepts their offer. To avoid being surprised (and cursed), before making an offer, imagine how you’d feel if the other party jumped at your offer, suggest Malhotra and Bazerman in Negotiation Genius. Then ask yourself, “Would her quick acceptance mean she knows more about the item’s value than I do?” If so, adjust your offer and perhaps search for new sources of value creation.
- Look for objective, expert advice. If there’s a chance the other party knows more about the value of the item at stake than you do, seek out an unbiased valuation from an expert, such as a mechanic in the case of a used car or a professional inspector in the case of a house, advise Malhotra and Bazerman. You also may be able to research the value of an item on the Internet. An unbiased, expert estimate can level the playing field and help you avoid the winner’s curse.
- Determine if you have an edge. The winning bidder in an auction is not always cursed, writes Subramanian in Dealmaking. Sometimes it may be the case that you value an item more than other bidders do. For example, for sentimental reasons, you may value a rare book written by your great-grandfather more than other bidders do. At other times, you may be more knowledgeable than other bidders about an item’s value. If you believe you would bring greater expertise than other bidders to a small company that’s being sold, you might feel comfortable making the highest bid. When you have this type of edge, the winner’s curse may not need to be a concern.
Have you ever been the victim of the winner’s curse?