What’s the anchoring effect in negotiation? Should you make the first offer? If so, what should it be?
According to Deepak Malhotra and Max H. Bazerman’s book Negotiation Genius, the anchoring effect refers to the first piece of information offered in a negotiation. This point determines how the rest of the negotiation will go.
Learn more about anchoring in negotiation below.
Decide Whether to Make the First Offer
At some point during your negotiation, you must decide whether to make the first offer or allow the other party to make it. According to Malhotra and Bazerman, if you’re confident you know what your counterpart’s RV is, you should make the first offer. Having an accurate estimate of their RV allows you to make a good first offer that’s sufficiently aggressive and allows you to capture the most value (as opposed to making an offer that’s too weak or too aggressive).
The authors argue that the first offer largely impacts the outcome of a negotiation because of anchoring in negotiation. The anchoring effect is the tendency for people to be swayed by the first piece of information presented. By making the first offer, you set a reference point that the other side must adapt to. For example, if you ask for a high salary in a job negotiation, you signal to the recruiter that you have a lot of value. This makes it challenging for the recruiter to justify a much lower offer.
(Shortform note: In How Highly Effective People Speak, Peter D. Andrei explains why we’re susceptible to the anchoring effect: Our perception of the world is relative and we need reference points to make sense of things. For example, a student might feel happy about their score on an exam only to be disappointed when they learn that the majority of the class scored higher. Andrei argues that you can even use irrelevant anchors to alter people’s expectations. If you’re trying to sell a boat, for instance, you might talk about the prices of luxury cars with the other party beforehand. After discussing expensive cars, they may perceive your asking price for your boat to be much more reasonable, even though it’s a different vehicle.)
Conversely, if you’re uncertain about your counterpart’s RV, you should let the other side make the first offer. This way, you avoid making an offer that’s too soft or too aggressive.
However, if you let your counterpart make the first offer, you must resist being influenced by the anchor by shifting the focus of the conversation away from it. The more you talk about the anchor, the more it affects the negotiation. To pivot the conversation, you can reply that you view things differently than they do and shift the conversation to a different topic as a way to find common ground. Another way you can respond is by making an aggressive counteroffer and then suggesting both sides moderate their offers. You can then take control of the conversation by explaining why you made your counteroffer.
(Shortform note: You can better resist an anchor established by the other party’s first offer by creating an anchor for yourself before your negotiation. To do this, research relevant numbers and data before your negotiation—for example, the listing prices of other homes in the neighborhood in which you’re selling a house. This allows you to go into the negotiation with a preexisting frame of reference, making you less likely to be influenced by offers made by the other party.)
|Who Should Make the First Offer?|
The question of whether you should make the first offer in a negotiation or wait has been widely debated by negotiation experts. While Malhotra and Bazerman suggest you base your decision on how well you think you know your counterpart’s RV, other experts argue that there are other factors at play. Let’s examine different expert stances on who should make the first offer.
You: Like Malhotra and Bazerman, many expert negotiators encourage you to make the first offer if you feel confident in doing so. Some research has shown that the anchoring effect of first offers affects nearly all negotiation situations, regardless of culture, power levels, and the number of issues being negotiated. However, you might want to time your first offer differently depending on the culture. In certain countries (such as Japan), offers serve as information sharing and are offered at the start. However, in Western cultures, you should wait a little before making your first offer as this promotes more valuable and creative agreements.
The other side: Other experts argue that there are psychological reasons for letting your counterpart make the first offer: Negotiators who make the first offer tend to feel more anxiety and less satisfaction about the negotiation, even if they receive a better deal than they would have had they let the other side make the first offer.
What Should Your First Offer Be?
If you decide to make the first offer, the authors suggest you make a bold offer that you know your counterpart will reject. If you’re buying, make an offer lower than their RV. If you’re selling, make an offer higher than their RV. This way, you can keep the whole ZOPA open for negotiation. If you ask for an amount that’s lower than their RV (when selling) or make an offer higher than their RV (when buying), you give up some value right away. For example, if you think they’ll pay $15,000 at most for something you’re selling and you ask for $14,000, you lose $1,000 of potential value. Instead, you should ask for something higher than $15,000, like $16,000. Conversely, if you’re buying, and you think they won’t sell for under $15,000, you might offer $10,000.
(Shortform note: Some experts argue that a first offer must be both ambitious and precise to get the best results during a negotiation. For example, instead of a price of $15,000, you might ask for $15,599. Experts argue that asking for a precise number gives people the impression that you’re knowledgeable about the true value of what you’re offering.)
To avoid making an extreme offer that upsets your counterpart, you must have a way to justify it. Find a good reason and offer relevant information to your counterpart. You should also consider the context of the negotiation. Depending on the purpose of the negotiation and your relationship with the other side, you might want to adjust how aggressive your first offer is, especially since your goal is to also strengthen your relationship in the process.
(Shortform note: Making an extreme offer can also damage your credibility. If you’re unsure about whether your offer is realistically ambitious or too extreme, consider giving a range of numbers but attaching different terms to different price points. For example, you might offer to pay more for a product that has an extended warranty.)
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Here's what you'll find in our full Negotiation Genius summary:
- Why a good negotiation depends on your ability to create value
- How to avoid common negotiation pitfalls and make attractive deals
- How to decide whether or not to make the first offer