Thursday, October 25, 2012

When you negotiate, don’t argue

There are lots of opportunities for negotiation these days.  Bargain hunters wander through weekend garage sales and haggle with the sellers.  Car buyers have to settle on a final price for a car with a dealer.  House hunters send proposals back-and-forth trying to decide on a selling price for a house.
There is a lot of interesting psychology in these negotiations.
The first thing that happens in most negotiations is that either the buyer or the seller makes an offer.  That initial offer serves as an anchor.  Research on the rules that people use to make judgments suggests that we often use a strategy called anchoring and adjustment.  According to this strategy, we start with some anchor point and the adjust our belief about the true value based on other information.
In the case of a negotiation, we know that people try to buy low and sell high.  So, if the buyer makes an offer, the seller knows that the initial offer needs to be adjusted upward to get a fair price.
The key question is how much that offer should be adjusted.
This issue was addressed by Yossi Maaravi, Yoav Gonzach, and Asya Pazy in a paper in the August, 2011 issue of the Journal of Personality and Social Psychology.  They were interested in the role that persuasive arguments might play during negotiations.
Because people use the initial offer as an anchor, many people have suggested that including a persuasive argument for why the anchor is correct may minimize the amount that people adjust the anchor when making their counteroffer in the negotiation.  For example, if you are interested in buying a house, the seller might ask for $350,000, arguing that the house was newly renovated and is near good schools. 
Maaravi, Gonzach, and Pazy argued that when people hear an argument in favor of the initial offer, they think of counter-arguments.  These counterarguments may actually push the counteroffer further away from the initial offer than it would have been had there been no persuasive argument.  Someone looking at a house might find all the areas that still need renovation and think about other houses even closer to the better schools in town and give a low offer on the house.
They supported this view in a number of studies.  In one of the four experiments in this paper, half the people played the role of the seller of a factory, while the rest played the role of the buyer.  Everyone received detailed information about the factory. 
In some groups, the seller was asked to make the first offer.  For half of these groups, the seller also had to give arguments in favor of their offer.  In this case, the counteroffers by the buyer were lower when the seller made arguments in favor of the initial bid than when the seller gave no arguments.  The buyers were asked to write down reasons for their counteroffers, and they gave more reasons for making a low bid when they were responding to arguments by a seller than when there were no arguments.  The final price the group agreed on was also lower when the seller made arguments with the initial offer than when no argument was made.
The opposite pattern was observed for groups where the buyer went first.  In this case, sellers generated more reasons why the buyer’s initial offer was bad when the buyer made arguments along with the initial offer than when there were no arguments.  The sellers made higher counteroffers when there were arguments along with the initial offer than when there weren’t.  Finally, the purchase price was higher when the buyer made arguments than when there were no arguments made.
Putting all this together, then, it appears that it is hard to be persuasive when negotiating.  People enter negotiations knowing that the other party is an adversary.  Each side wants to get the best deal, and so they treat every piece of information given by the other party with skepticism.  They find reasons why persuasive arguments are flawed and use those counterarguments when adjusting the anchor set by the initial offer.
What does this mean for you?
If you are involved in a negotiation, it is probably a good idea to make the first offer.  That initial offer serves as an anchor.  However, after you make that initial offer, resist the temptation to give reasons to justify that initial bid.  Instead, let the other party come back with a counteroffer.  Chances are, that counteroffer will not be adjusted as far away from your initial offer as it would have been if you had made arguments in your own favor.