When to Come Out Swinging
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Leadership Mar 2, 2011

When to Come Out Swinging

Devise the right strategy for negotiations or online auctions

Based on the research of

Adam D. Galinsky

Gillian Ku

Thomas Mussweiler

Negotiations and auctions are both structured economic exchanges, but the strategies used in the two are radically different.

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Indeed, the two are entire­ly dif­fer­ent games with dif­fer­ent sets of rules and psy­cho­log­i­cal vari­ables. Should you wait for your nego­ti­at­ing oppo­nent to make the first offer? Should you set a high open­ing price on your eBay list­ing? The key to suc­cess in both nego­ti­a­tions and auc­tions is under­stand­ing the psy­cho­log­i­cal process­es involved, says Adam Galin­sky, a pro­fes­sor of man­age­ment and orga­ni­za­tions at the Kel­logg School of Man­age­ment. That knowl­edge can sug­gest strate­gies that could help you gain the upper hand in these forms of eco­nom­ic exchange.

Nego­ti­a­tions: The Best Defense Is a Good Offense

The con­ven­tion­al wis­dom about nego­ti­at­ing is that it is best to wait for the oth­er side to make the first offer. By receiv­ing the open­ing offer, the argu­ment goes, you will gain valu­able infor­ma­tion about the oth­er side’s bar­gain­ing posi­tion and insights into pos­si­ble agree­ments. How­ev­er, Galin­sky, along with Gillian Ku, an assis­tant pro­fes­sor at the Lon­don Busi­ness School, and Thomas Muss­weil­er, a pro­fes­sor at the Uni­ver­si­ty of Cologne, report that many stud­ies have shown that the final sell­ing price tends to be high­er when the sell­er makes the first offer and low­er when the buy­er moves first. This phe­nom­e­non is known as anchoring.

In their research paper, Galin­sky and his col­leagues explain that two attrib­ut­es of human think­ing account for anchor­ing. The first is the ten­den­cy for peo­ple to use the val­ue of the first offer in esti­mat­ing the true val­ue of an item or ser­vice up for nego­ti­a­tion and to adjust insuf­fi­cient­ly from this anchor. For exam­ple, when the sell­er makes the first offer, the buy­er knows the num­ber is like­ly too high and adjusts down from it when mak­ing the coun­terof­fer, but the buyer’s coun­terof­fer is still anchored by the val­ue sug­gest­ed by the seller’s first offer. 

This is known as insuf­fi­cient adjust­ment.” The sec­ond fac­tor, selec­tive acces­si­bil­i­ty,” is that peo­ple tend to focus on infor­ma­tion that is con­sis­tent with the val­ue of the anchor, ignor­ing attrib­ut­es that are incon­sis­tent. For exam­ple, when car deal­ers give a high open­ing offer when sell­ing a car, the buy­er takes note of fea­tures, such as lux­u­ry extras, that are con­sis­tent with the high price, Galin­sky explains.

The com­bi­na­tion of these two think­ing process­es can explain the influ­ence of start­ing prices on final prices in nego­ti­a­tions. The buy­er knows she should adjust from the seller’s high open­ing offer, but does so insuf­fi­cient­ly. Sim­i­lar­ly, her opponent’s high open­ing offer selec­tive­ly directs nego­tia­tors’ atten­tion toward an item’s pos­i­tive attrib­ut­es; in con­trast, a low­er open­ing offer would direct atten­tion to its flaws,” the authors write. These process­es are hard to over­come, so you need to have psy­cho­log­i­cal pro­tec­tions in place,” Galin­sky says.

Stay Focused
One way to pro­tect your­self from these phe­nom­e­na dur­ing nego­ti­a­tions is to focus on facts that are incon­sis­tent with your opponent’s first offer, such as the amount you would like to receive or weak­ness­es in your opponent’s posi­tion. Anoth­er way is to coun­terof­fer at the oppo­site extreme.

These process­es are hard to over­come, so you need to have psy­cho­log­i­cal pro­tec­tions in place,” Galin­sky says.

As an exam­ple of pro­tect­ing against an extreme open­ing offer, Galin­sky described an expe­ri­ence he had nego­ti­at­ing with a Moroc­can rug ven­dor. Galin­sky was con­sid­er­ing mak­ing an offer for two rugs, but before he made an offer, the ven­dor said the price would be $10,000. In that con­text, you have to go as far as pos­si­ble to the oth­er extreme some­times, so I start­ed off at $100,” Galin­sky explains. The vendor’s next offer was $5,000 and Galin­sky coun­tered with $200. They set­tled at $1,500, much clos­er to the small­er con­ces­sions that Galin­sky had made. 

In a nego­ti­a­tion about the price of suits in Thai­land, Galin­sky wrote down his open­ing offer at the same time the sales­per­son wrote down his offer. In the end, they made a deal near the mid­point of the two ini­tial offers. What deter­mined the mid­point was not his offer or my offer, but the com­bi­na­tion of the two offers,” Galin­sky says. If I make an extreme first offer as a sell­er, then I’m going to anchor the coun­terof­fer and the mid­point is going to be much clos­er to what I want it to be. But if I go sec­ond, then I have to make a pret­ty aggres­sive coun­terof­fer or the mid­point is going to be biased against me.”

Although research indi­cates that start­ing high in nego­ti­a­tions leads to high end­ing prices, there are lim­its. When study­ing fac­tors that make for a suc­cess­ful nego­ti­a­tion, Galin­sky and his col­leagues found that the final price is only part of the pic­ture — it is impor­tant to con­sid­er whether a deal will get made. For exam­ple, an unrea­son­ably high start­ing offer might anger or dis­cour­age the nego­ti­at­ing oppo­nent and decrease the chance of reach­ing a settlement.

Galin­sky explains that the per­son who has more infor­ma­tion in a nego­ti­a­tion has more pow­er. This helps explain the one sit­u­a­tion in which mak­ing the first offer may not be to your advan­tage: when the oth­er side has much more infor­ma­tion about the item to be nego­ti­at­ed or about the rel­e­vant mar­ket than you do. In these sit­u­a­tions, your opponent’s open­ing offer could pro­vide you with addi­tion­al information. 

But, Galin­sky warns, it is impor­tant to remem­ber that infor­ma­tion pro­vid­ed by that offer will be biased. How­ev­er, if you lack infor­ma­tion, your first offer could be extreme­ly low or unac­cept­ably high and it could be to your ben­e­fit to wait. This does not mean that you should sim­ply let the oth­er side make the first offer. Rather, you should lev­el the play­ing field by gath­er­ing more infor­ma­tion about the item, the indus­try, or your opponent’s alter­na­tives to the nego­ti­a­tion. A well-pre­pared nego­tia­tor can make the first offer with con­fi­dence and there­fore anchor the nego­ti­a­tion in their favor, Galin­sky says.

Auc­tions: Open Low
In con­trast to nego­ti­a­tions, where start­ing high usu­al­ly leads to a high­er final price, in auc­tions start­ing low can often pro­duce a high­er sell­ing price.

One major fac­tor that dif­fer­en­ti­ates auc­tions from nego­ti­a­tions is the num­ber of par­tic­i­pants. In nego­ti­a­tions the num­ber of actors is often pre­de­ter­mined as two peo­ple nego­ti­ate one on one. How­ev­er, in auc­tions the num­ber of bid­ders is deter­mined by the fea­tures of the auc­tion. Max­i­miz­ing the num­ber of par­tic­i­pants in an auc­tion ben­e­fits the sell­er — a greater num­ber of par­tic­i­pants will usu­al­ly result in a high­er end­ing price, so from the per­spec­tive of the sell­er, it makes sense to focus on fac­tors that will increase participation.

Galin­sky illus­trat­ed this point by describ­ing the expe­ri­ence of a col­league who want­ed to sell a sink on eBay. He list­ed it at a price of about $200 and no one bid on it. You’ve have to start low in this case or you’re cre­at­ing bar­ri­ers to entry,” Galin­sky advised his col­league, who relist­ed the sink for $75. It even­tu­al­ly sold for $275.

Low prices decrease psy­cho­log­i­cal bar­ri­ers to mak­ing a first bid. Once some­one makes a bid, they become invest­ed in the process — that is, they spend time and ener­gy on bids that can lead to a sense of com­pet­i­tive­ness with the oth­er bid­ders and a desire to win” the auc­tion. This phe­nom­e­non is known as esca­la­tion of com­mit­ment to sunk costs.” As the bid­ding activ­i­ty increas­es, both cur­rent bid­ders and poten­tial new bid­ders may see the item as being excep­tion­al­ly valu­able. Because bid­ders use traf­fic as an indi­ca­tor of val­ue, ear­ly bid­ding begets lat­er bid­ding, cre­at­ing a herd­ing effect.

As an exam­ple of how com­pet­i­tive bid­ding can result in high­er prices, Galin­sky told of a col­league in Ger­many who bought a Baby­B­jörn baby car­ri­er for 75 euros. He used it for a year for his baby, then sold it on eBay. He start­ed the auc­tion at 1 euro and it even­tu­al­ly sold for about 85 euros, more than the cost of a new one. You can see how these auc­tions can cause you to make irra­tional respons­es,” Galin­sky said. You can over­pay because of the psy­cho­log­i­cal prop­er­ties of auctions.”

But Galin­sky warns, If you are going to start low in an auc­tion, you have to be care­ful that you know what the mar­ket looks like.” He relat­ed the expe­ri­ence of a friend who was try­ing to sell old indie rock phono­graph records. He set the open­ing price quite low on the the­o­ry that it would gen­er­ate com­pet­i­tive bid­ding, but only one bid­der was inter­est­ed, so that per­son got all of the records very cheaply.

Adjust Accord­ing­ly
The abil­i­ty to adjust your strat­e­gy is the key to suc­cess in both nego­ti­a­tions and auc­tions, accord­ing to Galin­sky. Just as the play callers in a foot­ball game might take one approach in fair weath­er and anoth­er in a pour­ing rain, par­ties to a nego­ti­a­tion and sell­ers and buy­ers at auc­tions must adjust their strate­gies based on an assess­ment of their cur­rent situation. 

One strat­e­gy is to go first in a nego­ti­a­tion and go high; anoth­er strat­e­gy is go low in auc­tion when there is a lot of traf­fic,” Galin­sky con­clud­ed. But even if you can’t do those things, you can think about ways to pro­tect your­self, based on these process­es. That’s what exper­tise is — under­stand­ing the sub­tle dis­tinc­tions that don’t give you just one strat­e­gy, but knowl­edge that enables you to per­fect­ly cal­i­brate your strat­e­gy to the cur­rent situation.”

Relat­ed read­ing on Kel­logg Insight

Increas­ing Rev­enue from Online Auc­tions: Buy­er-sell­er inter­ac­tions affect cus­tomer val­ue in two-sided markets

Going, Going, Wrong: Com­pe­ti­tion and col­lu­sion among auc­tion bidders

To Set­tle or Not to Set­tle: Nego­ti­a­tions and attor­ney inter­ests in med­ical mal­prac­tice cases

Featured Faculty

Adam D. Galinsky

Member of the Department of Management & Organizations faculty until 2012

About the Writer

Beverly A. Caley, JD, is an independent writer based in Corvallis, Ore., who concentrates on business, legal, and science topics.

About the Research

Galinsky, Adam D., Gillian Ku, and Thomas Mussweiler. 2009. “To start low or to start high? The case of auctions versus negotiations.”Current Directions in Psychological Science18: 357–361.

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