One of the trickiest stages of any negotiation is when to make the first offer.
No one ever wants to go first. But that first number possesses almost talismanic properties — it can profoundly influence how the other side perceives the value of what you demand. Studies have in fact shown that negotiators who make the first offer often do better than those who wait. Why? According to an article by Kellogg School of Management Morris and Alice Kaplan Professor of Ethics and Decision in Management Adam Galinsky,
The answer lies in the fact that every item under negotiation (whether it’s a company or a car) has both positive and negative qualities — qualities that suggest a higher price and qualities that suggest a lower price. High anchors selectively direct our attention toward an item’s positive attributes; low anchors direct our attention to its flaws…
Anchoring research helps clarify the question of whether to make the first offer in a negotiation: by making the first offer, you will anchor the negotiation in your favor…
While this may be true, Galinsky has also found that one of the most common negotiation mistakes is to make a first offer that isn’t aggressive enough.
An aggressive first offer can work in your favor for several reasons. Take the perspective of the seller: more extreme first offers lead to higher final settlements. For example, higher listing prices lead to higher final sale prices in real estate transactions because, as we’ve seen, high-anchor offers lead buyers to focus on a negotiated item’s positive attributes. In addition, an aggressive first offer allows you to offer concessions and still reach an agreement that’s much better than your alternatives…
One of the best predictors of negotiator satisfaction with an outcome is the number and size of the concessions extracted from an opponent. By making an aggressive first offer and giving your opponent the opportunity to “extract” concessions from you, you’ll not only get a better outcome, but you’ll also increase the other side’s satisfaction.
While starting with an aggressive first offer can give a negotiator the edge at the table, there is a caveat:
Of course, it’s important that your opening offer isn’t absurdly aggressive. The first offer provides preliminary insight into the bargaining zone and range of possible agreements. An absurd offer can lead the receiver to believe that no agreement exists that will be acceptable to you both and therefore can cause her to walk away from the negotiation.
Unfortunately an unidentified Katrina victim didn’t have the benefit of Galinsky’s wisdom: this individual filed a claim with the United States Army Corps of Engineers seeking more than $3 quadrillion in compensation.
(Hat tip to Lowering the Bar.)