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Victoria Pynchon

As the co-founder of She Negotiates Consulting and Training, I offer my services as a keynote speaker, trainer and consultant....

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She Negotiates

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Aggressive First Offers and the Nash Equilibrium

Recently, in response to my Power Point Presentation on Cognitive Biases (the one labeled Social Psychology Insights) I mentioned that aggressive first offers "anchor" the bargaining range in favor of the first offeror.

Our correspondent and resident blog expert on cognitive biases, Michael Webster of the BizOpNews Due Diligence Blog, responded as follows:

Hmm, anchoring to support aggressive opening bids? Doubtful, despite the academic literature -which in my opinion has little contact with real negotiation.

And nothing about coordination versus nash equilibrium reasoning? Big oversight, in my opinion.

Because I respect (and generally defer to) Michael's opinion, but because I disagree with him this time, I include here my response and open the discussion to our readers.  To help our readers, I'd like to ask Michael, if he has the time, to provide us with his thoughts about the coordination v. nash equilibrium reasoning that is absent from my Power Point Presentation (an absence I'd like to rectify before giving this presentation on the 13th of November)

Response to Michael:

 For once in my blogging-career, Michael, I'm going to differ with you but ask for help on the coordination v. Nash equilibrium reasoning. 

It's difficult to "observe" the effects of anchoring and framing outside of a controlled environment. You need to have a kind of duplicate bridge experience where the bargaining partners are all negotiating the same deal to determine the effects of framing and anchoring. Research shows we'll all deny that we've been effected.

I have, however, participated in these types of role plays with "teams" of seasoned attorney negotiators.

In fact, it was the first of these experiences, on my first day of mediation training through the Straus Institute here in Malibu (at Pepperdine where the fires were yesterday -- terrible) that I experienced the power of anchoring first hand.

All twenty attorney teams negotiated a buy-sell contract for about 45-minutes. When we returned to the classroom, we all put our negotiated deals on the blackboard together with the first offer made.

I'd been taught as a young attorney NEVER to make the first offer -- folk practice where I come from, i.e., California.  In the role play, without exception, the negotiator who made the first offer in the hypothetical bargaining session got the best deal -- often by many magnitudes.

THIS is the moment when I decided I wanted to return to school to learn more about this and everything else having to do with negotiation -- rules of persuasion, the effect of cognitive biases, etc.

Since that time, what I've read in the academic literature on controlled negotiation studies, not only on students but on judges and attorneys and business people, has concluded that he who makes the first offer sets the bargaining range and gets the best deal.

As to Personal Bargaining Experience.

Since I've been mediating full time, I've helped lawyers negotiate hundreds of deals. Still, it's difficult for me to say whether the first offer had a substantial anchoring effect because I don't know how the negotiation would have turned out had the other side made the first offer or if the first offer had not been more or less aggressive.

More importantly, a REAL negotiation to settle a REAL dispute is so multi-determined that I can't imagine being able to opine on which of the many factors was determinative (assuming one factor could ever be determinative) of the final deal.  

Every deal in my business results from a combination of the vitality of the parties' legal and factual positions; their financial and personal or business interests; the personalities of the attorneys and the disputants; the willingness of the disputants to share information that will increase the number of options available; the negotiation and "people" skills of the mediator; and, numerous other factors that I often am never advised of, i.e., at the end of one difficult negotiation session, I learned for the first time that two of the three parties had been negotiating the sale of one of their businesses while I was negotiating the settlement of an unfair competition lawsuit.

We weren't even negotiating the same matter!

Insights?

Comments (10)

Read through and enter the discussion by using the form at the end
michael webster - October 22, 2007 4:05 PM

First, I agree that there is a substanial body of evidence which shows that in a simplified offer/accept bargaining game, the bigger offer does serve as an anchor.

But I don't think that this amounts to much.

Recall, that anchors are in play when the underlying distribution of events in either not known or only dimly guessed at. Anchoring works as an effect when there is uncertainty.

In the experiments, too many real life details are left out and the participants are left with an excessive amount of underlying uncertainty about the range of possible value.

In the experiments, it doesn't surprise me that the particpants react to the uncertainty just as anchoring predicts.

And while I do think that there are real life examples of anchoring, having to do with earnings or revenue claims, in legal bargaining large claims have to be backed up with either evidence, legal skill or a combination of both.

The real reason not to make a first offer is that you need to find out what the conflict is about before you can make a serious offer that will be entertained by the other side.

This brings me to my next observation: cooridnated solutions versus nash equilbrium plays.

My own small area of specfic talent is diagnosing those conflicts in which one of the two strategies creating value (coordination strategies) or claiming value (nash equilibrium) stands out, wrongly, as the only strategy. This illusion persists often even for experienced bargainers. {You might ask, why I don't see the illusion.)

Here is a simple example, which I wrote about, here: http://www.bizop.ca/blog2/how-would-you-play-that/shubiks_dollar.html

In the dollar auction game, the strategy of claiming value - by being the high bidder - completely overwhelms the creating value strategy - how we can both share in buying a $20 bill for less than $20.

But even once individuals see that it is in their interest to coordinate, one person stops bidding and both share the proceeds, it is not obvious how the group can credibly commit to the sharing strategy. (My solution calls for one person to ask for money to stop bidding.)

There are many examples of these strategic illusions -which I am currently categorizing to turn into a publication.

But all of the examples have to do with the illusion that the point of the game or conflict is only to claim value -which generally leads to suboptimal bargaining.

My own view, which is generally not shared by the academic or practical world, is that these strategic illusions about what the point of the game are the most important ones to solve. (But may I am wrong and I just like illusions that I can unravel?)

Finnegas - October 22, 2007 4:43 PM

Hello Victoria, From experience of dealing with "Travellers" -Irish roadside dwellers and dealers- I have to agree with you. About every second year I buy something from them, just to watch their methods and they always open high and early. They beat any academic for putting manners on a person. . . .

michael webster - October 22, 2007 11:57 PM

Further to my comments about coordination versus nash illusions, I would direct the interested reader to pages 2-6 in The Manager as Negotiator, and the discussion of "Les Wilson's Dilemma".

It is a sophisticated and real life example of how a) thinking about the cooridinated solution, and b) figuring out a credible commitment on your part which will force the other party to do their part leads to an optimal decision -trumping, in this case, the chancy IP trial.

Chris Annunziata - October 24, 2007 12:19 PM

I was fascinated to see your post about anchoring and aggressive first offers. Over on my site, I just posted a recap of a one-hour presentation given by Professor Guthrie of Vanderbilt Law regarding The Psychology of Negotiation and Influence - including a discussion of anchoring and the benefit of making the first offer.

My wife negotiates for a living and will readily attest to the real world benefit of anchoring and making the first offer. She is a music supervisor. Movie and TV producers retain her to negotiate and acquire the rights to use commercial music in audio/visual productions. In her business, there is no generally accepted cost structure for these compositions. While the amounts that are agreed upon for these rights are based loosely on past experience (with similar pieces of music and even the same piece of music), it is truly a free market where the price of the commodity (a song) is determined by what a buyer is willing to pay and a seller is willing to accept.

Despite the fact that she is the "buyer" in the deal, it is her practice to always include an offer in her initial contact with the "seller." She finds that this allows her to control the negotiation to a certain extent. Over the years she and her business partner have learned that unless you indicate to the seller the amount you are willing to pay, they will make irrational demands.

Sometimes, she avoids negotiation altogether by making the first offer. For example, she licensed a song that went to #2 on the charts and was on the charts for 20+ weeks. Based on prior experience with similarly popular songs, she expected the song to cost $6000 per week for the type of use needed (and had advised her clients as much). She initially offered $3000 per week, and the parties accepted the deal without modification.

More often then not, there is significant negotiation involved. She is currently working on a deal to procure the rights to a song off of an album by a Grammy nominated, platinum selling artist. The song is less well-known, but the album reached #2 on the charts. She advised her client that the project would cost between $90,000 and $95,000 and made an initial offer of $52,000. The copyright holder countered with $104,000. The deal is still in progress, but she expects to close the deal somewhere around $80,000 - less then expected.

She has also dealt with rights holders who have an irrational opinion of the value of their music and anchoring does not work. She recently had a deal fall apart when a rock band with a moderate following on the college and alternative charts refused to even negotiate. Based on the chart-success and apparent popularity of the song the client wanted, she believed the project would settle somewhere around $7000. When she offered the band $5000, they responded with a quote of $11,000. She then raised her offer to $6,000, but the band refused to move and the deal fell apart. Unbeknownst to the band, they are now on her blacklist and she will advise clients against using them at all in the future.

In short, she firmly believes that anchoring works.

Geoff Sharp - October 24, 2007 10:09 PM

Vickie, I will leave the theory of anchoring to others. All I can say as a coalface mediator is that I see anchoring ( and for the sailors amongst us, slip anchoring, where you play out a taught rope slowly until it bites on the bottom) in action in money mediations sometimes twice a week. It impacts the negotiation and when partnered with some factual/legal merit and the odd affordibility issue thrown in for good measure, it becomes a powerful tool in experienced hands.

emmy irobi - October 25, 2007 12:28 PM

Dear Vickie
Once again let me thank you for your blog which is most educative. On the issue of Anchoring,I think it works some times.I appreciate that article.
Remain Blessed,
Emmy Irobi
mediator from Poland

Michael Webster - October 25, 2007 12:37 PM

Chris and Geoff, let me be more clear on my view of anchoring. Yes, in a conflict in which one side does not have an objective way to measure or order the underlying possible outcomes, anchoring will be present.

For example, Chris's wife is dealing with parties who don't have her objective data about the value of the song. She can credibly use anchoring.

Geoff may be describing anchoring or framing. I don't know. But in a mediation just over money, we should reach a bargaining impasse where we do need a focal point to coordinate around. Geoff may be describing this also. Again, I don't know.

I know I am being a pest about definitions, but it is important to keep different conceptions just that - different.

Andrea Schneider - October 31, 2007 11:54 PM

As one of the academics with little real negotiation contact (about which characterization I can protest another day!) I think that anchoring can have a real effect whether or not there is objective data regarding the situation. There are, in fact, very few situations where there is only one objective piece of valuation. Even when there is case law regarding the dispute, lawyers are extremely talented at spinning the law. (Well, yes, this jury awarded $100,000 but our case in different in these three ways...)

Therefore, the first offer anchors the parties around certain criteria rather than other criteria. Chris' wife is effective, not because the parties with whom she is negotiating have no clue about the worth of their songs, but rather because there are so many different ways of valuing their songs that she anchors them around her preferred criteria.

In terms of the first offer being aggressive, I would caution on makin the offer too aggressive. For anchoring to work to your benefit, clearly the offer should be reaching or optimistic. At the same time, the offer should be justifiable (in some way linked to some objective criteria) so that the other party uses the anchor as their base rather than throwing it out completely.

Michael Webster - January 8, 2009 12:10 PM

Interesting research, showing the exact opposite:

"Recent research by Adam Galinsky and J. Keith Murnighan, professors in the Management and Organizations Department of the Kellogg School of Management, and Gillian Ku of London Business School turns tradition on end. In a paper published in the Journal of Personality and Social Psychology, the researchers show that low rather than high opening bids—for a variety of products from shirts to fancy rugs in online auctions—generate high selling prices, demonstrating a reversal of the anchoring effect."

Read it here:

http://insight.kellogg.northwestern.edu/index.php/Kellogg/article/place_your_bids

Keith Murnighan, one of the authors, is a pretty bright guy, in my opinion. Maybe that is because I consistently like his stuff!

Buy a business Los Angeles - May 7, 2013 11:32 AM

This text is worth everyone's attention. Where can I find out more?

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