The “First Offer” Dilemma – When Should You Make the First Offer in Negotiations?

Here is another of our favourite guest posts of 2016 - from Vengat Narayanasamy of GEP. For additional interesting thinking on procurement, please visit the GEP Knowledge Bank.

The conventional wisdom among negotiators? Don’t make the first offer, sit tight and wait for the other side to float the first number. This advice is based on the fact that the other party’s offer may provide clues to their goals, alternatives, and perhaps unknowingly give away some of the bargaining zone.

German social psychologist Thomas Mussweiler researches how people’s comparisons of options influence decision making. He says that negotiations “typically involve a great deal of uncertainty on both sides.” It is difficult to assess the intrinsic value of something, and we instead use the most immediately available information, such as the other side’s opening offer, to consider our response. Final agreements are more strongly influenced by the first offer than by any subsequent behavior of the parties, particularly when issues under consideration are of uncertain or ambiguous value.

Anchoring Effect                        

Anchoring in a negotiation involves “naming your price” or fixing your negotiating position through declaration of goals that may or may not be readily apparent to your counterpart. Economists Amos Tversky and Daniel Kahneman first documented the anchoring bias in an experiment involving a roulette wheel marked with numbers ranging from zero to 100. Each participant witnessed a spin of the roulette wheel. They were then asked whether they thought that the percentage of United Nations member countries from Africa was greater or smaller than the number spun on the wheel. Next, they were asked to estimate the true percentage.

Participants who saw the wheel stop on the number 10 guessed, on average, that the actual percentage of African countries belonging to the United Nations was 25%. By contrast, those who saw the wheel stop on the number 65 guessed, on average, that the percentage from Africa was 45%. In the experiment, a clearly random number nonetheless had a dramatic impact on people’s judgements.

Behavioral economist Professor Dan Ariely of Duke University, author of “Predictably Irrational,” offered products such as computer accessories, wine and books to the subjects of a 2003 experiment. Each subject was first asked if they were willing to pay a price determined by the last two digits of their social security number. The subjects were then asked the maximum price they were prepared to pay. Subjects with above-median social security numbers were prepared to pay amounts over 57% more than subjects with below median numbers. The anchors (the subjects’ social security numbers) were totally random but still affected the price the subjects were prepared to pay.

The anchoring process also applies in non-monetary assessments. In another study conducted by Mussweiler, participants were asked about Mahatma Gandhi’s age at his death. One group was asked if Gandhi was 140 years at death and another group if he was nine. All members of both groups correctly indicated he was neither age. They were then asked how old he actually was when he died. The group who were initially asked if he was 140 gave estimates which, on average, were 17 years older than the estimates of the second group. The subjects used the initial ludicrous suggested ages as anchors from which they then adjusted (Gandhi was aged 78 when he was assassinated in 1948). Nobel Prize-winning economist Daniel Kahneman describes this as a “priming” process by which the subjects search their minds for information as to Gandhi’s real age, which is consistent with the suggested ages.

Research on the anchoring bias has shown that negotiators may be able to gain an edge by making the first offer and anchoring the discussion in their favor. The decision of whether to make the first offer generally should be based on two factors: 1) your knowledge of the zone of possible agreement (ZOPA), and 2) your assessment of the other side’s knowledge of the ZOPA:

  • If both sides have a strong sense of the ZOPA, anchors are unlikely to have a strong impact.
  • If neither side knows much about the size of the ZOPA, you may be able to effectively drop an anchor, though you could risk being too concessionary or too demanding.
  • When you believe the other party likely knows more than you do about the size of the ZOPA, you will have difficulty anchoring effectively.
  • If you know a great deal about the asset up for discussion, you can make an aggressive first offer with confidence and expect that your offer will anchor the discussion to your advantage.

What should you do if your counterpart makes the first offer? A common mistake is to make a counter-offer. Harvard Law School Professor Guhan Subramanian advises you first recognise the anchor and then defuse the anchor clearly and forcefully. After defusing the anchor, make your counterproposal and explain why it is fair and justifiable.

Emotional Implications of Dropping an Anchor

In a series of bargaining research studies, researchers Ashleigh Shelby Rosette of Duke University, Shirli Kopelman of the University of Michigan, and JeAnna Abbott of the University of Houston asked subjects about their emotional state, such as whether they felt anxious during negotiation scenarios and whether they were satisfied with the outcome. The negotiators who made first offers felt more anxiety than those who did not and, as a result, were less satisfied with their outcomes. Yet those who made first offers did better in economic terms than those who did not.

If you value only the economic outcome of your deal, make a first offer in order to anchor the negotiation in your favor. But if you value satisfaction with the negotiation process more than the outcome itself, you may want to avoid the stress and anxiety of making the first offer.

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