Friend and Foe: When to Cooperate, When to Compete, and How to Succeed at Both (22 page)

In 1996, when Michael Jordan negotiated his contract with the Chicago Bulls, he opened by requesting an ambitious $52 million, more than double what any professional U.S. athlete had ever been paid. After a back-and-forth exchange of offers, the parties settled for $30 million. Jordan's salary of $33.14 million for the 1997–98 season, a 10 percent increase from the previous year, remains the single highest annual salary in the history of the National Basketball Association. By making the first offer, Jordan positioned himself to earn the highest salary that any NBA player has ever earned.

The Michael Jordan example addresses one of the most vexing questions that plague negotiators: whether or not we should make the first offer. This question is beset by uncertainty. Will I make an offer that undercuts my position and sell myself short? Or will I make an offer so outrageous that the other side walks away from the bargaining table in a huff?

To answer the question of whether or not to go first, we turn to data—a lot of it. Over the past decade, we and others from around the world have conducted dozens of studies that investigate the question of whether or not to go first. The vast majority of these studies find that it
is
better to go first in most negotiations!

But in looking closely at this data we've also learned that the benefits of going first hinge on two principles. The first principle is information. If we lack information then going first makes us vulnerable to exploitation. The second principle is a concept first introduced by Daniel Kahneman called anchoring.

An anchor is a numeric value that influences subsequent evaluations. It is called an anchor because it quite literally pulls judgments in its direction. When a seller lists a price for their home, for example, the list price anchors subsequent bids. As the buyer prepares their offer, it is almost impossible not to be pulled in the direction of the list price. Just as an anchor keeps a boat close, numerical anchors keep subsequent judgments closer than they might otherwise be.

Anchors exert outsized influence for two reasons. First, we underestimate the force that anchors can exert. Take the sticker price for a used car. Let's say the list price is $30,000. We know that the car is worth less than the asking price and so we adjust away from that price. We think, hmm, the car has to be worth less than $30,000. So we start with $30,000 and move down from there. Perhaps we ultimately agree on a price of $28,500. We might feel pretty good about ourselves, right? After all, we paid much less than the sticker price. But in reality, we may have moved too little as we adjusted away from that sticker price. Even though we knew $30,000 wasn't right, we often fail to appreciate how far away we need to adjust.

Second, every item that we negotiate over, whether it is a car, a job, or a firm, has both positive and negative features; some qualities suggest a higher price and other qualities suggest a lower price. When the seller of a used car makes the first offer, this higher anchor directs our attention toward positive features of the used car such as low mileage or the leather interior; however, when the
buyer
makes the first offer, this lower anchor directs attention to the poor features that suggest low quality, such as dents and the rattle in the dashboard, thus reinforcing the effects of the lower or higher anchor.

When we make the first offer, we anchor the negotiation in our favor. With Thomas Mussweiler of the University of Cologne, we have empirically established that it is often better to go first in a project. We ran a very simple experiment. We randomly assigned which negotiator—buyer or seller—would make the first offer in a negotiation over the sale of a pharmaceutical plant. If the two negotiators could not reach a deal, the buyer would need to build a new plant for the cost of $25 million, and sellers would strip their plant and sell the equipment separately for $17 million. Given these alternatives, we expected the final price to be in the range of $17 million–$25 million, giving the negotiation a bargaining zone of $8 million.

If it is better to go first, the final price should be higher when the seller makes the first offer than when the buyer does so. And that is exactly what we found across our experiments. On average, when the seller made the first offer, the final price was $24 million, but when the buyer made the first offer, the final price was only $20 million.

The first-mover advantage is not an American phenomenon. We have 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.

Making the first offer can also curtail power differences in a negotiation. In a variation of the study we just described, we gave either buyers or sellers more power by making their alternatives even more attractive. When they had power
and
they made the first offer, they did particularly well. When they had power and their counterparts made the first offer, however, the advantage of having power was canceled out by the disadvantage of going second. Going first, in other words, can be an equalizer of power differences.

But in some situations, it's
not
in your interest to go first. Why? As one book boldly titled
Never Make the First Offer
argues, 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. There are two types of missing information that can get us into trouble. First, we might have no idea how much our counterparts are willing to accept (or pay). Second, when negotiations involve many issues, some of them may be a common-interest issue where we both want the exact same outcome (e.g., we both want an early closing date). When we make a first offer without those pieces of information, we can tip our hand and reveal information that makes us vulnerable.

Let's consider this first problem—when we don't have a good sense of what our counterparts will accept. In situations like this, it may be better to wait to receive the first offer.

In fact, the invention of the lightbulb and the phonograph may have depended on going second. Thomas Edison had a new invention that he thought would improve the telegraph machine. So he took his new 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 is at least 20 times what he was going to ask (and is the equivalent of $833,333 in today's dollars). He used this unexpected windfall to build a laboratory, “The Invention Factory,” where he created the phonograph and the electric lightbulb.

Some of you may be fans of the History Channel show
Pawn Stars
, a reality show that depicts customers selling items at a pawn shop. You may have noticed that in this show, the pawnbroker often asks the seller to make the first offer. Bryan McCannon of St. Bonaventure University analyzed data from this show and found that in this case, for the pawnbroker buyer there was an advantage to going second. Why? Because most sellers who come on this show haven't the first idea about what their item is worth: because they were unaware of the true value of their item their offers were far too low.

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 sellers 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. And when the buyer went first, they overvalued how much the car was worth to the sellers.

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 Ford Thunderbird negotiations), going first can get us into trouble.

Now let's consider the second problem. Going first can also get us into trouble when we have common interests. Here's how. Imagine, after weeks of searching, you find the home of your dreams. You make an offer and ask for the early closing date that you really want. By revealing your preference for an early closing date, you create an opportunity for a strategic foe. Even if the seller also prefers an early closing date, they might ask for a
concession
to accommodate your request for the early closing date. So even though the seller actually wanted an early closing date, they pretend this date will hurt them and ask for $10,000 more for the house to “accommodate” your need for an earlier closing date.

Whenever a negotiation involves multiple issues, be on the lookout for common-interest issues. A savvy counterpart can use the information revealed in our offer to demand concessions on other issues.

Research we conducted with David Loschelder of Saarland University reveals how this works.

In one study, we used the same negotiation we described earlier over the sale of a pharmaceutical plant but we added a new issue to the negotiation. When the parties had opposing preferences for this issue (one side wanted more and the other side wanted less), we found a large first-offer advantage: Negotiators who made the first offer captured the lion's share of the pie, approximately 60 percent of it. However, when the additional issues were common-interest issues, and both parties wanted the same outcome, making the first offer was a disadvantage. Here, negotiators who made the first offer got less than 40 percent of the pie. In other words, when a negotiation has a common-interest issue, there can be a disadvantage to making the first offer.

So we see that every negotiator faces the first-offer dilemma. Going first can give you an advantage by anchoring the negotiation in your favor. But if you lack information, it can leave you vulnerable to exploitation. Receiving the first offer, on the other hand, can leave you susceptible to being anchored but it can also give you an advantage by providing you with important information.

The million-dollar question is: How can we get the anchoring advantage of making the first offer without revealing information that the other side can use to strategically gain an advantage over us?

No solution is perfect, but here's our advice: Make your first offer
later in the negotiation process
, after you have had time to talk with your counterpart and gain information.

Think back to the used-car negotiation. The buyer valued the car a lot for its valuable parts but the seller valued it very little. By making an early offer, the buyer or seller can't help but reveal how much they value the car. This makes them vulnerable.

But let's imagine an alternative to making the first offer right away. Instead of jumping right in with a first offer, what if you asked your counterpart some questions? For example, as the seller you might ask, “What do you plan on doing with the car?” By asking questions, we can gain valuable information that helps us understand how the other side values the car. Armed with this knowledge, we can then anchor the negotiation in our favor by making the first offer.

In an experiment we conducted with Marwan Sinaceur of INSEAD, we varied not only who made the first offer but
when
the first offer was made. Some negotiators were told to make their first offer very early on in the negotiation, in the first minute or so. Other negotiators were told to make their first offer only after discussing the negotiation with the other side for at least 15 minutes.

And indeed, we found that a late first offer afforded a competitive advantage without making the negotiator vulnerable. Negotiators who made late offers were able to anchor the negotiation in their favor without suffering from an informational disadvantage.

Here is the key idea:
A well-informed negotiator does better by going first
. But when the other side has much more information than you do about the negotiated item, it can be better to go second. So always take the time to gain more information—information about the item, about the industry, about your opponent's preferences—both through due diligence before the negotiation and by asking probing questions during the negotiation.

There is another benefit to waiting to begin the negotiation with an immediate offer: Having discussions before an offer is made produces more creative deals that can satisfy the interests of both sides. A late offer, in other words, produces both a competitive advantage and a cooperative solution.

Of course, the decision of
when
to make an offer is only part of the story. When we make an offer, we also have to decide
what kind of
offer to make. Should we start high or low? How ambitious should we be? We turn to these questions next.