This week our post comes from a friend, David Lipshutz, a negotiating expert. I found his article relevant so thought to share it.
The wisdom goes that when negotiating, you should aim high with your opening offer (or low, if you’re the buyer). Sounds pretty obvious right? In fact, it’s not just common sense. It’s a well-practised tactic grounded in plenty of academic research and even has a name – Anchoring.
Anchoring is a cognitive bias, first documented by economists Amos Tversky and Daniel Kahneman which describes the common tendency by humans to give too much weight to the first number put forth in a discussion and then inadequately adjust from that starting point, or “anchor.” Incredibly, we even fixate on anchors when we know they are irrelevant to the discussion at hand.
To prove this, Tversky and Kahneman conducted an experiment using a roulette wheel marked from 0 to 100 but rigged to always land on either the number 10 or 65. Participants were asked to guess the percentage of African countries belonging to the UN after watching a spin of the roulette wheel. When the roulette wheel stopped on 10, the average answer by participants was 25%. Remarkably, this response jumped to 45% for those participants witnessing a spin landing on 65.
The Misconception: You rationally analyse all factors before making a choice or determining value.
The Truth: Your first perception lingers in your mind, affecting later perceptions and decisions.
The anchoring effect provides a powerful counter argument to those who proclaim that you should never make the first offer in negotiations. Indeed, a skilful negotiator will often employ this strategy, firing an aggressive opening offer and thereby, effectively anchoring discussions to their advantage.
The Danger of “Over-Anchoring”.
Making too bold an opening offer, however, is not without risk. In the haste to anchor discussions in their favour, there is a tendency by some people to lead with an overly opportunistic proposal. After all, what’s the downside? At best, there’s proven research to support this strategy. At worst, if the other party picks up that you are anchoring, they can simply respond with their own counter proposal and ignore your tactic. But this approach is short-sighted and dangerous. An audacious opening bid can be mistakenly misconstrued as an insult offer. An insult offer is exactly as its namesake suggests – insulting. If this is the perception, the response by the other party can then be precarious and unpredictable. Opening too aggressively risks having the other just party walk away and killing the deal. Moreover, it can also lead you to lose credibility for future negotiation and look very foolish when you ultimately end up settling for much less.
Pitching your opening bid is, therefore, something which needs to be given careful consideration and thought. It is a delicate balance between anchoring high and insulting the other party. That’s why I always advise people to open with a firm but plausible bid.
In Summary: If you can’t look the other party in the eye and justify your offer while keeping a straight face, then it’s a tell-tale sign you need to revise your offer. You only get one shot at an opening bid, so put the time in to get it right.