Great Negotiations Start with Great Offers

It is better to offer than to request when negotiating.

Posted Dec 02, 2020

Public domain via Wikimedia Commons
Source: Public domain via Wikimedia Commons

Negotiations involve situations in which each party has one or more resources the other party wants to achieve their goals. Negotiating an agreement involves finding a way to exchange some of those resources in order to help the parties achieve their goals.

At the start of the negotiation, one party typically makes some kind of offer to the other. A question that has been explored in a number of studies is whether it is best to be the one who makes the first offer or the one who reacts to it.

As with every difficult question related to psychology, the answer is, “It depends.”

In particular, a paper in the September 2020 issue of the Journal of Personality and Social Psychology by Johann Majer, Roman Trotschel, Adam Galinsky, and David Loschelder suggests that it depends a lot on how the first offer is framed. In particular, it is better to start by focusing on what you are giving to the other party and then asking what you want in return than the reverse.

Lots of research in psychology suggests that first offers can have a big impact on a negotiation if the number in the offer serves as an anchor. In a job negotiation, a firm might offer you a salary of $40,000. You might want more than that, but if the $40,000 anchors the negotiation, then you might not adjust upward enough and so you might settle on $45,000, even though the firm might have been willing to go higher.

Majer and colleagues suggest that the first offer is most likely to serve as an anchor when the initial focus is on what you are giving to the other party rather than on what you’re requesting.

In one study, pairs of participants negotiated over a sale of shares of stock in a fictional company. One participant was assigned to make the first offer. This offer either focused on what they were going to give to the other participant (“I will give $X for 15 shares of stock”) or what they wanted from the other participant (“I request X shares of stock for $3”). The participant making the offer had to fill in the amount of money or stock in that statement. Then, the other party could counteroffer. The negotiation continued until the parties reached an agreement or chose to walk away from the negotiation. The task was set up so that the more money the party paid for the stock, the less profit they made and the more profit their negotiation partner made.

In this study (and the other negotiation studies in this paper), all pairs reached an agreement. When the initial offer focused on what the party was giving to the other (“I offer…”), then the party making the offer tended to make more profit than the one receiving the offer at the end of the negotiation. In contrast, when the initial offer focused on what the party wanted from the other (“I request…”), then the party making the offer tended to make less profit than the one receiving the offer.

Why does this happen? When the first offer focuses on what the second party is going to get, that offer serves as an anchor, and first party gets a favorable deal. When the first offer focuses on what the second party has to give up, the second party ignores that offer, because they don’t want to have to give things up. So, the second party makes in return tends to be aggressive and the final agreement ends up favoring the second party.

This finding is replicated in several different ways in the paper.

This work suggests that there is value in being the first one to make an offer in a negotiation, because it allows you to set the terms of the negotiation. However, if you do have the opportunity to make that initial offer, you have to focus first on what the other party is going to get from the negotiation rather than what they are going to have to give up. Otherwise, you run the risk of provoking an aggressive counteroffer.

Of course, if you are going to make the first offer, you have to do so with knowledge about what is reasonable. The first offer only makes a good anchor if it is favorable to you. If you don’t have much knowledge in the area, you might undercut your prospects by making an offer that is less than the other party might have been willing to provide.

References

Majer, J.M., Trotschel, R., Galinsky, A.D., & Loschelder, D.D. (2020). Open to offers, but resisting requests: How the framing of anchors affects motivation and negotiated outcomes. Journal of Personality and Social Psychology, 119(3), 582-599.