To Start High or Start Low?

One of the major questions that negotiators ask is whether to start “high” (i.e., as the seller, to make a more extreme offer) or to start “low” (i.e., make a more modest offer)? Researchers have shown that whether you believe you are in a “negotiation,” or in an “auction,” can make a dramatic difference in the answer to this question.

In a negotiation, there are a fixed number of actors; when someone puts a number on the table, the other party responds to that offer with a counteroffer, and the give-and-take often leads to agreement. In these situations, high starting offers often end in higher negotiated outcomes (because the offer and counteroffer define the bargaining range and the parties move toward the middle of that range). In contrast, in an auction, there are an unknown number of actors. In these situations, low starting offers can attract other actors into the auction, parties who might not otherwise be interested. As one or more of these actors enter the auction, they create excitement and attract other parties into the bidding; some of the actors become enmeshed in sunk cost dynamics and drive the price up. Hence, in an auction, lower starting offers tend to lead to higher final settlements.

As the researchers note, the primary contributing factor to these different dynamics is something called “anchoring effects” – a powerful psychological effect that occurs when a starting numeric value (in a negotiation or auction or other “estimation”) influences how subsequent numeric values are introduced and judged.