One of the most vexing questions for negotiators is whether to make the first offer. It’s a dilemma plagued by uncertainty: Will I make a bid that undercuts my position and sells me short? Or will I make an offer so outrageous that the other side walks away from the bargaining table in a huff?
Fortunately, there’s now a lot of data to help negotiators decide wisely. Over the past decade, other researchers and we ourselves have conducted dozens of studies investigating when and whether it’s smart to go first in negotiations. The vast majority find that most of the time it is.
According to the available data, the benefits of going first hinge on two principles: information and anchoring. The first is pretty intuitive; if you lack the right amount of relevant information, then going first can put you on shaky ground. Anchoring is a little more complicated.
An “anchor” is a numeric value that influences subsequent evaluations by quite literally pulling judgments in its direction. When a seller lists a price for her home, for instance, it’s almost impossible for a buyer not to be drawn in the direction of that list price. Just as an anchor keeps a boat close, numerical anchors keep subsequent judgments closer than they might otherwise be. When we make the first offer, we anchor the negotiation in our favor.
Anchors exert outsize influence for two reasons. First, most of us underestimate the force that anchors can exert. Take the sticker price for a used car. Let’s say it’s $30,000. We know that the car is worth less than the asking price, so we adjust away from it. Perhaps we ultimately agree on a price of $28,500. We might feel pretty good about ourselves–after all, we paid much less than the sticker price. But in reality, we may have moved too little. Even though we knew $30,000 wasn’t right, we often fail to appreciate just how far away we need to adjust.
Second, every item we negotiate over–whether it’s a car, a job, or a firm–has both positive and negative features; some qualities suggest a higher price and others suggest a lower price. When the seller of a used car makes the first offer, this higher anchor directs our attention toward its positive features, like low mileage or the leather interior. However, when the buyer makes the first offer, this lower anchor directs attention to its drawbacks, like dents and the rattle in the dashboard.
In numerous studies, we’ve found that making the first offer leads to an upper hand–what’s known as the “first-mover advantage.” And it’s not an American phenomenon. We’ve found these effects all over the world. In studies we conducted in both France and Thailand, the negotiator who made the first offer got a better deal.
But in some situations, it’s not in your interest to go first. Why? Sometimes receiving a first offer gives you insight into the other side’s bargaining position. By waiting and listening, you protect yourself from error and gain valuable intelligence.
To determine when it makes sense to wait and let the other side make the first offer, we need to take stock of how much information we don’t have. Consider this: Thomas Edison had a new invention that he thought would improve the telegraph machine. So he took his ideas to the Western Union Telegraph Company. When Western Union asked him to name his price, his initial instinct was to shoot for the moon and ask for $2,000. But for some reason he stopped himself and said instead, “How about you make me an offer.” Western Union opened with $40,000! That was at least 20 times what he was going to ask (and is the equivalent of nearly $1 million in today’s currency). He used this unexpected windfall to build a laboratory where he later created the phonograph and the electric light bulb.
In the History Channel show Pawn Stars, customers sell their personal items to a pawn shop. In the show, the pawnbrokers typically ask the sellers to make the first offer. Bryan McCannon of Saint Bonaventure University analyzed data from the show and found that in this case, the brokers have a statistical advantage in going second. Why? Because most sellers who come on the show don’t have as good an idea as the brokers do about what their items are worth. That ignorance typically leads them to low-ball their offers.
We confirmed this result in a project we conducted with Elizabeth Wiley of Columbia University using a negotiation simulation involving the sale of a used 1970 Ford Thunderbird. The car wasn’t in good condition, and the seller only wanted a minimum of $300 for it. However, the buyer wanted the car for its parts; for the buyer, the car was worth at least $2,000. When sellers made the first offer, they undervalued the car for the buyer. And when the buyer went first, they overvalued how much the car was worth to the seller.
So when we have no idea how much our counterparts will value the item up for negotiation (as we found with the Pawn Stars and Thunderbird negotiations) going first can get us into trouble.
So what’s the solution?
Step 1: Gain as much information as you can. This starts before the negotiation, when you do your homework and due diligence. And it continues during the negotiation, when you ask important questions and listen carefully to the answers.
Step 2: Ask yourself these two questions:
- Do you know why your counterpart values the item?
- Do you know what prices they would consider reasonable?
If you can’t answer both of these questions, then keep gathering information before you make the first offer. If you find the answers are impossible to get, then invite your counterpart to make the first offer. But if you can answer them confidently, be bold and go first.
This article is adapted from Friend & Foe: When to Cooperate, When to Compete, and How to Succeed at Both by Adam Galinsky and Maurice Schweitzer. It is reprinted with permission.