We identified a few posts back (here) the positional negotiations in which you should make the first offer and those in which you should let your negotiating partner offer the first concrete number. And we determined that it all comes down to the anchoring bias and its nemesis, knowledge. So, when you have substantial information about the target of the negotiation, it is in your interest to anchor the bargaining where you want to land. But if there’s a lot of uncertainty, let the other party throw out a number and you can use that offer to gather more information about how the negotiation may go.
But let’s play this scenario out further. Let’s say for a moment that you’re the one who makes the first offer. Perhaps you are selling a domain name or some piece of memorabilia. You have done some research and believe you have a good sense of the value despite some lingering uncertainty about willingness to pay, so you are comfortable making the first offer. You say, I’ll sell this to you for $500. And the other party immediately and with no hesitation says, “DONE. Here’s the money. Don't call us, we'll call you."
What’s your next reaction?
It’s probably something like…oh darn. I must have just lost out big. If he didn’t even give me a counteroffer, I must have left a lot of money on the table!
Buyer's (or Seller's) Remorse
This phenomenon is called the Winner’s Curse. Even though you may have “won” the negotiation because your target price or offer was accepted, the quick acceptance gives you a new piece of information: You could likely have extracted more value from the bargain! Which feels like a psychological defeat. Although you may be pleased with final price – it was your offer, after all – you cannot shake the nagging feeling that you’ve been duped in some way by leaving money on the table.
We frequently see this phenomenon in auctions and other competitive bidding. Imagine that you are engaging in a silent auction for art. The highest bid will win the piece (regardless of inherent value). The information asymmetry is not on value but on the participants’ willingness to pay. So, your strategy is to bid as high as you are comfortable, in an attempt to bid $1 higher than everyone else – but no higher. There is a long line of economics literature that establishes that auction winners are routinely disappointed in their win. The act of winning confirms that the winner bid more money than anyone else did. But how much more? How much extra money did the winner pay than was necessary to win? And, separately, how much more might have he paid than it was actually worth?!
Winning isn't always all it’s cracked up to be.
Implications of the Winner’s Curse
There are two takeaways here, depending on whether you’re the one making the first offer or the one receiving it.
If you’re the one making the first offer, presumably – if you have read the prior post – you’re in a high-information position, and your offer is going to reflect market value and other objective considerations. But with the threat of the winner’s curse lurking in the background, you want to make sure that that first offer you put out there is aspirational enough for you that you’re going to feel good about it, even if it gets accepted. When you throw out that first offer, make sure that it bakes in enough warm and fuzzies for you. If it turns out later that a quick acceptance means you might have left some money on the table, it won't matter too much to you because you still feel like a fair deal was concluded. Never make an offer that you’d be disappointed to have accepted.
Now, if you’re the one receiving the first offer, what do you do? Well, in a true one-off game where the parties don’t know each other and there’s no chance for repeat play once the deal closes, the winner’s curse might not really matter all that much. As long as the bargain and the exchange are made, then whether one party is suffering the psychological effects of the winner’s curse may not seem like a problem. But, as I often say, especially in today’s highly connected world, there can be reputational effects from even simple one-off negotiations. Moreover, it’s always in a negotiator’s interest to leave the other party at least minimally satisfied so that he doesn’t later try to back out of the deal or break the contract or fail to perform fully, depending on the circumstances. So, it’s almost always in your best interests for the other guy to walk away from the deal happy, too.
So, how should you reply when you think you’ve been presented with the deal of the century?
Always negotiate.
If you’re expecting to hear a bid for $500 but your bargaining partner comes in at $20,000, ask for $25,000. Re-anchor yourself to their (very favorable) position and bargain around that. At the very least, ask for some kind of non-price concession. Create some kind of reasonable pushback on the initial offer. I would not necessarily recommend swinging for the fences here. You want to assure the other party that there is a deal to be made. So, I might not counter at $50,000 if you would have been happy with $500 (although, again, it’s possible that they’d go that high…this is why research and knowledge are key). Rather, push back enough to make the other party feel like you are engaging in what some negotiation researchers call the “Negotiating Dance.”
Engaging in the Dance in a situation like this is, counter-intuitively, a gift to your negotiating opponent even though you will be asking him for a concession. The other side gains the psychological benefit of feeling like he fought through a tough negotiation and landed at a fair bargain. You can eliminate the threat of the winner’s curse and extract more value from the deal in the process. Total win-win for you.
So, to recap, we recognized that winning negotiations can come with its own pitfalls. In particular, offers that are quickly accepted can generate feelings of buyer’s (or seller’s) remorse because the information we gain through the negotiation itself indicates to us that we did a bad job making the first offer. Negotiators experiencing the winner’s curse may develop resentment and animosity for future deals or, worse, seek to renege on or sabotage the deal that has just concluded.
In order to avoid the winner’s curse for ourselves, we need to make sure that when we choose to make a first offer, we ask for something aspirational enough that we’ll actually feel happy with it – even if it gets accepted. And if we’re receiving the first offer, we want to always push back, always negotiate, so that we can give the other party a sense of accomplishment for driving a hard bargain even if he’s anchoring the deal orders of magnitude worse off for himself than he realizes!
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 – tell us!
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