When negotiating a price, never bid with a round number

Interesting research on bidding. We usually round off numbers but while bidding make a precise offer. It signals the seriousness of the bidder:

Here’s an easy tip for anyone negotiating to buy a car, a house, or even a company. When you make an initial offer, don’t bid with a round number like $10,000 or $1 million or $15 per share. Rather, bid with a more precise number, like $9,800 or $1.03 million or $14.80 per share.

According to a recent study of mergers and acquisitions, investors who offer “precise” bids for company shares yield better market outcomes than those who offer round-numbered bids.

“It turns out that if you make a precise bid, the targets are more likely to accept it, and more likely to accept it at a cheaper price. And with cash bids, they’ll generate a more positive market reaction,” says Matti Keloharju, a visiting scholar at Harvard Business School and co-author, with Petri Hukkanen, of the paper Initial Offer Precision and M&A Outcomes.

Their research builds on several previous social psychology studies showing that people place more value on precise numbers than on relatively round numbers. People tend to assume, true or not, that someone must have crunched lots of data to come up with an amount so specific. A round number, on the other hand, suggests that a person is just ballparking it—offering an approximate valuation based on vague knowledge.

In one 2013 study, for example, participants played an online game based on the TV show The Price Is Right, in which they had to guess the market price of three consumer products. Before making their guesses, they received “audience suggestions” for what they should bid. When given the chance to choose which audience members would help them on future bids, participants were least likely to choose those whose suggested bids had ended in zero. (See Show Me the Numbers: Precision as a Cue to Others’ Confidence by Alexandra Jerez-Fernandez, Ashley N. Angulo, and Daniel P. Oppenheimer.)

Precision also indicates determination. As an example, consider these two ways to propose a future rendezvous. “I could say let’s meet in one year, or I could say let’s meet in 365 days,” he says. “Now, if I say the latter one, it sounds pretty serious and precise. But if I say we’ll meet in a year, it sounds like, sure, maybe we’ll meet in a year, but maybe it’ll be more like one and a half years, or maybe some other time.”
Hmmm.
But don’t over do it:

That said, he warns that a bid too precise may make the bidder look suspicious, or even ridiculous, to the recipient. Bidding $1.03 million for a house is one thing. Bidding $1,033,235.83 is another.

“If a bid is too precise, it may strike as strategic to the recipient, rather than being driven by superior information,” Keloharju says. “This may lead the recipient to rethink whether the bid is really informed.”

 

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