Negotiating – start high, it’s a brainer

In entrepreneur world, we have to make prices up as we go along. Generally I’ve tried to avoid the tendency of service providers to pull prices out of thin air by making list prices and rules around to build, but sometimes, whether buying or selling, we gotta negotiate. And guess what – that old thing about starting low or high has firm psychological roots and reasons.

Sell High

My dear daughter, once again, seems to have this hard wired into her DNA already. I’d like to think it’s inherited from me, but something tells me it’s a learned behaviour that the super efficient four year old brain has figured out. “Daddy – if I eat all my dinner, then we’re going to play Lego Star Wars for 20 minutes OK?” She knows that’s more likely to get her 10-15 than if she starts at 10, which will get her nothing or 5 minutes.

The reason is that we “anchor” ourselves to a starting figure and adjust only until a plausible figure is reached. So if you’re the seller, start high in a negotiation. The buyer will naturally adjust away from your starting point, but only to a certain degree. It’s called the “Anchoring & Adjustment Heuristic”:

Anchoring and adjustment is a psychological heuristic that influences the way people intuitively assess probabilities. According to this heuristic, people start with an implicitly suggested reference point (the “anchor”) and make adjustments to it to reach their estimate. A person begins with a first approximation (anchor) and then makes adjustments to that number based on additional information. Wikipedia

An experiment by Strack & Mussweiler in 1997 involved estimating Ghandi’s age when he died. Before giving their answer, one group was asked if he was older or younger than 140 when he died. The other group were asked if he was older or younger than 9 years old. The first group estimated his actual age of death much higher than the second when asked – each were anchored to the original value they were presented with.

Watch out for this technique by clever salespeople… [ to those who know me... I used to jokingly quip when clients asked me for an estimate that "It'd be less than 100,000".. I'd like to publicly say that I had no idea I was setting them up for anchoring to a high price! ]

You can go some way to fixing your broken brain when someone hits you with a high opening price by focussing on their weaknesses, the bad stuff in their product. The high opening price has pushed your brain to look at the good stuff which is the limited information it will select when deciding how far to move from the original price in the negotiation; force it ignore that instead.  Adjustment is effortful so:

…anything that increases a person’s willingness or ability to seek more accurate estimates tends to reduce the magnitude of adjustment-based anchoring biases. (Epley & Gilovich)

…the conscious and deliberate nature of adjustment suggests that warning participants to avoid satisficing will increase adjustment. Indeed, we have found that warning participants about anchoring effects is sufficient to increase adjustment from self-generated anchors, but has no influence on participants’ responses within the standard anchoring paradigm (Epley & Gilovich, 2005)

There’s a great paper by Gallinsky, Ku & Mussweiler here (pdf) that explains all this in pretty simple language. Another essential one to read is Mussweiler, Englich & Strech’s paper the Anchoring Effect (pdf), particularly if you’re ever in court, and Epley & Gilovich’s awesome paper The Anchoring & Adjustment Heuristic (pdf) in the Journal of Psychological Science is some of the scarce information on why we don’t adjust enough.

Beware the Highball that’s out the park

And of course, one word of warning – the highballer’s goal is to create tension to move from the initial price. Too extreme and the buyer won’t take you seriously, they’ll just leave and dismiss you completely. Be prepared for them being prepared too – if your buyer knows, or simply says that you’ve taken a highball stance, you better be prepared to absorb and deflect that.

Tagged as: negotiating