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  • Writer's pictureAmanda Hinson

When to Make the First Offer

Updated: Oct 14, 2021


I am excited to present my first in the series of Real World Tips that I’m offering on the blog. My goal is to provide you with practical, usable advice, backed up by science and experience, about what to do and what to avoid in the world of negotiating. Although negotiating can be intimidating for many, I hope to demystify much of what makes the process of negotiation so difficult by naming some of the strategies you likely already use intuitively and providing some guidance in areas where you may get stuck. Negotiation is a learned skill and gets easier when you don’t need to reinvent the wheel each time. With these tips, you’ll be able to worry less about the process and concentrate more on the substance of what you’re trying to negotiate.


Even though we all engage in countless negotiations everyday – with our kids, with our partners, at work, etc. – one of the more universal experiences that most of us associate with Negotiating with a capital N is the dreaded salary negotiation. And, in fact, it was a discussion with one of my clients recently regarding her own salary negotiation that inspired me to choose this as the first topic:


In a negotiation, who should make the first offer?

Or, perhaps more precisely: In what kind of negotiations should you make the first offer?


In the case of my client, she is very successful at her job, and so another company is trying to poach her away from her current position. As part of the paper work she is being asked to fill out in the job discussions, there was a question marked: “Desired Salary.” She called me to get advice on what she should fill in. Here is what I told her.


Should she commit to an opening offer?


Stop for a minute, check in with yourself, and see if you have a gut answer to that question. Just for fun, I googled to see what the internet had to say. And, as I expected, I saw websites that said diametrically opposite things with equal force. Half said always make the first offer. And the other half said never make the first offer.


The correct answer is that both sides are right, only at different times. Sometimes it is to your advantage to make the offer, and sometimes it makes more sense to wait. Let’s explore why.


Anchoring


In order to understand this, we need to first discuss the concept of anchoring. Anchoring is a psychological term, and it describes a cognitive bias in our brains “to rely too heavily on the first piece of information offered” (as defined by Harvard’s Project on Negotiation). Basically, our brains are lazy. And they like to take shortcuts, called heuristics. But the problem is that while shortcuts are good in theory, they can sometimes lead to irrational results.



To illustrate this irrationality, researchers in 1974 (Tversky & Kahneman, 1974) wrote a paper demonstrating that anchoring can lead people's brains to conclusions that make very little sense. They ran an experiment in which participants spun a wheel to generate a random number between 1-100. Then, the researchers asked an esoteric question: Is the percent of African nations who are members of the United Nations greater than or less than that randomly generated number? Then, they asked the participants to take a guess as to the real percentage. And in a striking result, the researchers found that the number people would guess as to the percent of African nations in the UN was highly correlated to the number they had randomly generated! So, if they had spun a high number, the subject would guess a higher percentage of African nations were in the UN, and if they spun a low number, they would guess a lower percentage. Even though the subjects were aware that the number was generated completely randomly, just hearing the number still set an anchor in their mind, and then their ultimate guess reflected that anchor.


Other researchers (Lieder et al, 2018) have continued looking at this phenomenon and come up with reasons why people anchor even though it can seem utterly irrational. The tendency to anchor seems to be motivated by two propositions.


First, even though the results of anchoring may not seem rational, humans are what’s called “resource-rational,” which means that we recognize that computing things with our brains takes work and energy. So, if we’ve got other things to think about – which we always do – then we’re going to rely on a shortcut when we see one. So, yes, we’re just a little bit lazy, but we can call it optimizing the resources in our brain to make it sound more positive.


Second, though, we also have a default shortcut in our brains to trust that other people are being cooperative. Our brains just assume that if people are giving us information, it’s probably in the right ballpark and in good faith. Unfortunately, it turns out that we may not distinguish all that well between a human trying to give us an educated estimate versus a random number generator spitting out an irrelevant figure. It’s kind of nice to know how optimistic our brains are hard-wired to be, though, isn’t it? But, of course, the real world is not always as sunny as our brains hope.


So, there are actually good reasons for our brains to use heuristics like anchoring. That said, when negotiating, we need to be aware that our brains will automatically look to use these shortcuts. This means that when one party makes a first offer, the other party will have a tendency to negotiate based on that number - even if the other party's desired outcome is substantially different. The first offer can often cement the ballpark in which the negotiation takes place, sometimes without our even realizing that we're agreeing to negotiate in that ballpark! So we need to be hyperaware of our own thought processes and make sure that we are using our brain's efficiencies for our benefit and not to our detriment.


How do you overcome the anchoring bias?


The single biggest foil to the anchoring bias is knowledge.


If you are very well informed about the issue you’re negotiating – the price of a car, the value of a gem, the market rate for first-year associates, etc. – then you are going to be less susceptible to anchoring bias. Because you know what a fair price is for whatever it is you’re negotiating, your brain will not need to lean on any shortcuts to help you figure out where you want to land.


So, when should I make the first offer?


You should make the first offer only in situations in which you feel that you are a highly informed negotiator. Let’s explore why:


Low-Information Situations: Wait for an offer; Try to gain more knowledge

Let’s say you are entering a negotiation but you’re feeling a little bit uncertain about the product under discussion. Typically, you’re going to encounter this kind of negotiation when one party or the other ascribes a lot of emotional attachment to a product or there is some other intangible value to an otherwise ordinary asset. The same logic applies to any negotiation with a knowledge gap, though. So, maybe it’s the domain name of a website. You went out and bought a domain name a few years ago because you thought it sounded funny, and now there’s a business with that name who is interested in buying it. Right off the bat, you just have no idea how much it’s worth to them. You know how much it’s worth to you – very little, maybe just the sunk cost of the domain registration – but you don’t know whether this website is just something they’re casually pursuing or if it’s the lynchpin to their multi-million dollar launch strategy. You may initially not be aware of how deep the pockets are on the other side. From your perspective, you might be willing to part with the website for a hundred dollars to help a new nonprofit get off the ground, but you might think you could demand thousands from, say, a tech company.


In those two cases, if we remain limited to those facts, I would hold back on making the first offer. Let the other party come to you and give you a number to see if their offer will help shed light on their willingness to pay. If the number is disappointingly low, then you just reject it. In fact, if you can demonstrate that their offer was bordering on offensively low, you gain even more leverage in the negotiation and a stronger stickiness to whatever the next anchoring point becomes if you proceed to bargain. (We will go into how to make counteroffers in future posts.) Sometimes, though, you will get a first offer from the other party that far exceeds your expectations!


The number one rule in negotiating, though, is to educate yourself. The greatest source of negotiating power and leverage comes from knowledge. So, if possible, rather than waiting for the other party to make a first offer in a low-information setting, I would encourage you to try to gain more knowledge before the first offer is made to transform the situation into one in which you will be less anchored to another side’s first offer. As a general rule, the anchoring bias is well correlated with degree of ignorance (Jacowitz & Kahneman, 1995). The less you know, the more likely you will trust any number that the other side suggests. If information is scarce and inaccessible, though, let your opponent bid first.


High-Information Situation: Make the first offer to capture the benefit of anchoring

In situations with high knowledge, it is a great opportunity to use the anchoring bias to your benefit, so go ahead and make the first offer. Even if both parties are relatively knowledgeable in the negotiation, there is still an anchoring effect – so be the one to anchor! If you know that the car you want to buy is worth $30,000, you should start the negotiation below that number in hopes that the back and forth will, at a minimum, yield you a price at or below what you see as the fair market price. In another post, we’ll go deeper into how to bargain positionally and where to actually set these numbers. But if you feel like you’ve done your homework and you know within reasonable limits the actual value of the thing that you’re negotiating over, then you should confidently assert an opening offer that represents what you aspire to pay.


Salary Negotiation: High- or Low-Information Situation?


In the case of my client, she called me because she realized that she was operating in a low-information environment and was not sure how to respond. Should she suggest a desired salary to the new company, or might that actually limit how much she could earn if her suggestion was lower than they might have otherwise paid her?


In her case, it was easy to turn a low-information situation into a high one. The company interested in her is one with a number of competitors and with salaries that tend to move in relative lockstep based on position. By polling friends of hers in similar positions at a range of companies, my client was able to determine with some certainty a salary range into which she was comfortable that her new role would fall. Armed with that knowledge, she could confidently fill in the “Desired Salary” box in the paperwork with a number at the high end of that range, knowing that making the first offer would anchor her ultimate salary closer to the higher end of the range than the lower.


Unfortunately, not every salary negotiation will take place in a profession where the salary landscape can be relatively easily ascertained. So, if you are faced with this situation, you need to make the following assessment: How much do I know, and how much more can I know? Knowledge is always power, and likewise knowing how much you don’t know (and perhaps can’t know) can also translate to increased leverage in your negotiation.

 

To recap, the question we asked was who should throw out the first offer. Looking into the research, we realized that humans have a strong anchoring bias as a mental shortcut, so we recognized that the first number that gets thrown out in a negotiation has a substantial effect on where the deal ultimately lands. We saw that in a negotiation where you are very prepared and have a strong sense of the market value of what you are negotiating about, you should confidently propose an aspirational first offer. Use the anchoring bias to nudge the final deal closer to the number you’re looking for. If you are more uncertain in a negotiation, the first step always should be to try to gain more knowledge. Even if it’s just a quick google search about your negotiating partner or market rates, more knowledge is always going to yield you a better bargain. But if the uncertainty persists, then let the other guy throw out the first number. You might be pleasantly surprised by what you hear and anchored in a much better ballpark than you thought would be. And if not, you’re always free to walk away.


Hope that was helpful! Do you have any experience with the topic of the day? If you digest the lesson and put it into practice, what happens? Let us know! If something really helps you – or if you decide that we were very wrong – please share!



References:

Lieder, F., Griffiths, T.L., M. Huys, Q.J. et al. The anchoring bias reflects rational use of cognitive resources. Psychon Bull Rev 25, 322–349 (2018).


Jacowitz, K. E., & Kahneman, D. (1995). Measures of anchoring in estimation tasks. Personality and Social Psychology Bulletin, 21(11), 1161–1166.


Tversky, A., & Kahneman, D. (1974). Judgment under uncertainty: Heuristics and biases. Science, 185(4157), 1124–1131.

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