In business as in life, you don’t get what you deserve, you get what you negotiate. — Chester Karrass
If you’re like me, confrontation is probably not your favorite pastime. In which case, negotiations—which often involve a bit of confrontation—is not one of your favorite pastimes either. (If it is, you probably really like playing Monopoly.)
Fortunately, the wonderful world of science (and particularly this blog) has you covered.
So today, let’s talk about one critical point in the psychology of negotiation to get you walking away from the table with both Park Place and Boardwalk in hand (if you didn’t get that reference, you should play more Monopoly).
In 1996, Michael Jordan was negotiating his contract with the Chicago Bulls when he expected they would try to lowball him with a $4 million offer. To prevent this, he approached them first with quite a different proposal—a $52 million request. And after some negotiations, they settled around $33 million, making his contract the “single highest annual salary in the history of the National Basketball Association.”
Of course, that’s Michael.
Nonetheless, it’s worth emphasizing that researchers claim the first offer can be the most important aspect of the whole negotiation. In fact, analyses show that the first offer can account for about 50 – 85% of what ends up being the final outcome!
But for those of us without one of the most famous shoe lines around, does making such an “ambitious” first offer actually benefit us? As is always the case in psychology, it depends.
There are two things that happen with the first offer:
1). It sets an “anchor point.” This means that subsequent negotiations will be pulled closer to that starting offer from the simple fact that this amount is the initial point from which all other offers deviate. For example, if MJ had started with a lower request (e.g., $42 million), then the resulting amount would have also likely been lower (e.g., $23 million).
2). However, the first offer also conveys the offer-er’s intentions and priorities… And it’s this second point where making the first offer can work against you.
SHOWING YOUR HAND
Although the higher the initial offer, the better the result will likely be for the person making it, too high an initial offer can backfire. For example, too high a first offer can communicate that the person making it doesn’t know what they’re talking about, that they’re desperate for money, that they think too low of the other party, etc.
In which case, depending on how that initial offer is interpreted by the opposing group can really influence its effectiveness.
In one study, researchers randomly assigned people to be the “boss” or the “new hire,” where they had to engage in a negotiation over the new hire’s starting salary, how many vacation days they would have, and when they would start. Importantly, the researchers didn’t care which participant made the first offer (i.e., the boss vs. the new hire), only how that first offer influenced the resulting agreement.
From this, researchers found that whoever made the first offer (either the boss or the new hire), it typically resulted in better outcomes for the person making; however, this was only true when the first person didn’t reveal their priorities.
That is, when the person who went first mentioned which of those three things (salary, vacation time, starting date) was most important to them, the person who went second actually resulted in better outcomes. Because the person going second knew which topics they could push the initial person around on, they were able to end up with a better outcome for themselves.
WHAT TO OFFER
So, when you next enter a negotiation, whether that is about your salary, what restaurant to eat at, or what piercing your mom will let you get, be sure to make a relatively high first offer. The only time this may not be a good idea is if you’re uncertain what the exact value of the offer should be.
For a classic example, after Thomas Edison invented his “universal stock ticker,” he didn’t even have the gall to ask $5,000 for it. However, when his counterpart moved first and offered $40,000, Edison ended up with a sum he would have never achieved had he gone first.
So, if you do have a confident estimate for the value at hand, make the first offer but be sure not to give away what your true priorities in the deal are 😉
Psych•o•philosophy to Ponder: Although you may worry that this “first-mover anchor advantage” would only work against novice negotiators, research suggests it works against the experts, too (e.g., real-estate agents, car salespeople, and seasoned judges). One thing we didn’t talk about, though, is the motives of the other person in the negotiation. For example, if you’re trying to negotiate with a business client versus a friend, the two parties will likely have different motives for coming to an agreement. With a business client, they have more self-interested motives (they want the best outcome for themselves), whereas a friend will have more group-interested motives (they want what’s best for both of you). Interestingly, the disadvantage that comes from “revealing your hand” (i.e., your priorities) only happens when you engage with people with one of those two motives. Can you guess which it is?
Loschelder, D. D., Trötschel, R., Swaab, R. I., Friese, M., & Galinsky, A. D. (2016). The information-anchoring model of first offers: When moving first helps versus hurts negotiators. Journal of Applied Psychology, 101(7), 995.