Friend and Foe: When to Cooperate, When to Compete, and How to Succeed at Both (23 page)

Morton Franklin's financial future looked bleak.
¹
For the past three years he had been the only business in a one-block radius. Unlike his previous neighbors, Morton had refused to sell his property to a developer, even when he was offered $1 million, nearly double the investment he had made six years earlier. And now, after a multiyear legal battle, the court had ruled that the state could seize his property.

Why had Morton turned down such a clearly attractive offer? The developer wanted to build a new office complex and Morton believed the new development would destroy his neighborhood. By refusing to sell, he thought, he could prevent the new development from happening. But he was wrong.

To make matters worse, the court ruled that the developer only had to pay Morton the current appraised value, an amount equal to half of what the other businesses received to relocate. And the court also gave Morton an eviction notice: He had to move his business in short order.

As he thought about his plight, however, Morton realized that he still had leverage: He could fight the date of his eviction. Sure, he would probably lose, but he realized, through a little perspective-taking, that this option was problematic for the developer. Morton knew that a new development team was looking to buy his property, and that by delaying his eviction, he might disrupt the sale of the property.

So Morton developed a plan. He would propose a simple deal: He would agree to vacate the property immediately…for a price. And on deciding what that price should be, Morton asked himself a simple question: What was it worth to the developer for him to leave now?

Morton decided to make the first offer and to start high, very high—his opening offer was for over $4 million, more than
nine times
what the court said he was due.

Sounds ridiculous, right? Yet incredibly, the parties eventually settled for around $3 million. Morton had started very high, and as a result, he walked away with six times the amount he was officially entitled to under the court ruling.

Unlike Morton, most of us are apprehensive about making an extremely ambitious initial offer, whether it's a salary negotiation, the sale of a car or home, a settlement agreement, or even in a friendly arrangement with a friend or neighbor. If we are too ambitious, we fear we will offend our counterpart and lose credibility as we backpedal. Or worse, what if we so offend our counterpart that the other side storms away from the bargaining table? These are valid fears, of course, but our research shows they are often exaggerated. In fact, most people make first offers that are too wimpy!

What do we mean by an ambitious first offer? An ambitious first offer is one that is extreme and optimistic. An ambitious first offer is one that would produce your ideal outcome; it would make you jump for joy if the other side agreed to it. But it should be grounded in reality. Your first offer should be just
this
side of crazy, as opposed to
that
side of crazy.

To determine where exactly the line falls between this side and that side of crazy, we propose the straight-face test: Can you make the offer with a straight face? A related test is this: Can you provide a rationale for your offer? It doesn't have to be the most complete or compelling rationale, but you should be able to provide one. So, if you can make the offer with a straight face and you can justify it, then go for it—reach for the stars.

We should point out that the unfair double bind that women face, which we discussed earlier in the book, affects how ambitious one's offer can be. Hannah Riley Bowles of Harvard University found that women can face a social penalty for making aggressive offers. Gender unfortunately affects which side of crazy an offer falls on.

To understand why it pays to make an ambitious first offer, it is important to think back to our conversation on anchoring. As we just learned, first offers anchor the negotiation. And more extreme first offers produce a more extreme anchoring effect and give you a better outcome.

Let's return to our example of searching for a new home. You've found something you like and you prepare to make your offer. As you consider the price you'll propose, how influenced are you by whether the list price is high or low? Greg Northcraft of the University of Illinois investigated this very question. He showed professional real estate agents a home and gave them lots of background information (10 pages' worth, actually), and then he asked them to estimate the true value of the house. Everyone saw the same house and read the same 10 pages. The only piece of information that Greg varied was the property's list price. Some agents saw a high list price (i.e., an aggressive anchor) of $149,900 and others saw a low list price of $119,900. Although these trained real estate professionals all saw the same house, if they had seen documents with the higher list price, they thought it was worth on average $14k more!

This effect has been found to persist with used-car sales as well. In one experiment, Thomas Mussweiler took his 10-year-old car, a 1987 Opel Kadett E, to a number of different German mechanics to find out whether it was worth getting a dent fixed or not, given the age of the car. He then asked the mechanics what they thought the car was really worth. Before they could answer, Thomas casually mentioned what he thought it was worth. To some, he said 2,800 German marks ($1,556 at the time), to others, 5,000 marks ($2,778). Just like the real estate agents, the mechanics' estimates were heavily influenced by Thomas's anchor. Despite their vast expertise and knowledge about cars, the mechanics estimated the car to be worth a full 1,000 marks more when they were given the high versus low value!

What's interesting to note about both of these examples is that the experts knew the house or car wasn't worth the high anchor, and they adjusted down from it. The problem was that they didn't adjust
enough
. Even experts are tugged in the direction of an anchor.

Making an ambitious first offer is also advantageous because of the social norms that govern the negotiation process. When we engage in a negotiation, we
expect
to exchange offers, make roughly matching concessions, and “split the difference.” In fact, many negotiators routinely use those very words, “Let's split the difference.” The midpoint of the opening offers from each side seems fair. What this means is that after we make an offer, we can only go in one direction, down from our first offer. To make a later offer that is more extreme than your first offer violates social norms. The negotiation script means you can't ask for more than your first offer; that is, you can't add new demands later in the negotiation. And if you do, your counterpart will see you as a competitive foe to be vanquished.

Given the power of anchors and the social norms that govern negotiations, one of our central mantras when we teach negotiations is this:
If you don't ask, you can't get what you want
.

Consider a real-life negotiation involving our colleague Thomas Mussweiler. One Thanksgiving, Thomas was waiting for a plane that was severely overbooked, and the airline was looking for volunteers to get bumped off the flight and take one the next day for a $500 voucher. He went up to the gate official who had just given another traveler a single voucher and nothing else, and asked a simple question: “Will you put me in first class if I get bumped?” She said yes. Then he asked a follow-up question: “Will you pay for a hotel room for me tonight?” Again the answer was yes. “Okay, will you pay for my dinner tonight at the hotel?” “Yes” came the reply. And finally, “When we reach my final destination, will you pay for a cab to take me back to my home?” “Hmmm, okay.”
²

Thomas asked for and got lots of perks. Others did not ask for anything and got nothing in return. Sometimes it really is as simple as that.

Making an ambitious first offer not only gives you a competitive advantage, it also makes you appear more cooperative because it gives you room to make concessions and still reach a better deal. By contrast, when your opening offer is close to your bottom line, you have little room to maneuver. If your counterpart demands a concession, you can only make a very small one.

Giving ourselves room to make concessions is a key to turning a competitive negotiation into a cooperative one. One reason is simply that ambitious first offers alter your counterpart's expectations: If you start aggressively, they expect a tough negotiation, and can be pleasantly surprised when you seem conciliatory as you make some concessions. Second, the number and amount of concessions help the other side save face. When people tell tales of their negotiation prowess, they often describe how much they moved the other side off of their first offer. People want to think of themselves as effective negotiators, good at securing concessions. By making ambitious first offers with room for concessions, you can let the other side feel good about themselves and give them tales to tell of their negotiation prowess.

In other words, ambitious first offers let you competitively anchor the negotiation while giving you room to make concessions. By being competitive with an ambitious first offer you actually appear more cooperative!

President Barack Obama learned this principle the hard way. In 2011, the United States faced an economic crisis with a looming deadline for the debt ceiling, the limit on the amount of debt that the Treasury can issue. In the past, Congress would pass a bill to raise the debt ceiling without any stipulations. But this time, the Republican opposition wanted to extract concessions before they approved legislation that would allow the United States to continue to borrow money to pay its bills on time.

The Republicans made an aggressive, ambitious first offer in 2011. They proposed a plan entitled “Cut, Cap, and Balance” that would cut spending significantly, cap future expenditures, and amend the Constitution to require a balanced budget—all measures the Democrats vehemently opposed.

President Obama's first offer, however, was too accommodating. In response to the unprecedented move by the Republicans, Obama offered a compromise, including a blend of the spending cuts that Republicans wanted, along with tax increases on the wealthiest Americans that the Democrats wanted. But rather than accept this first offer, the Republicans demanded the president move off of his position and make even more compromises. And he did. Obama's next proposal no longer called for tax increases but simply tax reform, and he even offered cuts to the sacred Democratic programs of Social Security and Medicare.

Eventually, the United States avoided default when a deal was passed that included almost $1 trillion in spending cuts as well as a promise to cut spending by more than $1 trillion in the future—all measures favored by the Republicans. And Obama only got a modest rise in the debt ceiling; one that ensured that another showdown over the debt limit would arise in the near future. As one person lamented, he came across as “a pushover who will cede more and more ground the harder and longer they push.” It all started with a weak first offer.

But President Obama learned from these mistakes when he faced a similar debt-limit battle just two years later in 2013. This time he declared, “I will not negotiate over whether or not America keeps its word and meets its obligations. I will not negotiate over the full faith and credit of the United States.” It took a government shutdown, but the two sides finally reached a deal in which the president made almost no concessions. As one commentator noted, “They've learned the lesson. They've adjusted their tactics and taken a much harder line this time around.”

This example teaches us three key lessons. First, we need to guard against the psychological anchoring effect of the ambitious first offers that our counterparts make. How can you do this? Here's our advice: Write down your first offer before you hear the other side's offer.

Second, don't make your first offer close to your compromise solution. The other party will never accept it as the ideal solution and will demand you make further compromises to reach a deal. You want to make an ambitious first offer since the other side will almost always ask for concessions regardless of your offer.

And third, just keep in mind that there can be risks in making a very ambitious first offer. For Republicans, their extreme initial offer worked the first time—they gained steep concessions. But the second time, it cost them a government shutdown, for which the Republicans received a disproportionate share of the blame.

Some anchors are heavier than others. Here is a way to make your first offer as heavy and impactful as possible.

Imagine you are selling your car and you make the first offer to a potential buyer. How precise should you make your first offer? Two different groups of scientists, one group in Europe and the other in the United States, tackled this question independently and came to the exact same conclusion.

In one study, Malia Mason of Columbia University created three different first offers in a negotiation over jewelry. She found that people secured better deals when their first offer was more precise, at either $19.85 or $21.15, than when it was a round first offer of $20. Malia found that precise first offers are “heavier” anchors because they are seen as more informed compared to round offers. Indeed, other researchers have found that when people generate answers to trivia questions that are more precise, they are seen as more confident in their answers: e.g., How long is the Niger River in miles? Precise answer: 2,611 miles versus round answer: 2,600 miles. The more precise number conveys confidence and is taken more seriously.

A similar study was conducted in a shop that specialized in the restoration and sale of antique furniture. David Loschelder of Saarland University studied people who were browsing in an antique shop. He asked the shop owner to conduct an experiment for him. The shop owner asked customers to analyze a
secretaire
(which was worth approximately
€
700 in its unrestored condition) and offer what they would be willing to pay for it. It was listed with one of four prices: a nonaggressive round price of
€
900, an aggressive round price of
€
1,200, a nonaggressive precise price of
€
885, or an aggressive precise price of
€
1,185. David found that people were willing to pay the most when the first offer was both aggressive and precise, the
€
1,185 value. This was the only condition in which people were willing to pay more than
€
1,000. Ambitious offers that are precise are the heaviest anchors of them all.

Of course, a first offer can be too precise. Excited by this new research, Adam once gave a friend of his advice on how to list his house: Be as precise as possible. So this friend listed his condo in a high-rise building in Chicago with great precision, down to the $50 point. No one made an offer.

Inspired by this failure, we have conducted studies with Alice Lee of Columbia University and found that precise offers can create barriers to entry by scaring away potential buyers. Why? Precise offers signal confidence but they can also signal inflexibility. When you make a precise first offer you convey the message that you are confident in the amount you expect to receive and are not very flexible. This appearance of inflexibility can drive potential buyers away. Luckily, there are strategies we can use to prevent this from happening.