Do not bargain with round numbers

by on June 3, 2013 at 6:58 am in Economics, Uncategorized | Permalink

When negotiating for a salary, most of us reach for a nice, round number like $65,000. Or $90,000. Or $120,000.

But, by favoring all those zeros, we may be missing an opportunity to score a better deal, according to a new paper from researchers at Columbia Business School. They found that using more precise numbers in an initial request—or anchor, as it is known in negotiating parlance—generally results in a higher final settlement.

Precision conveys the impression that the job candidate has done extensive research and deeply understands the market for his services, said Malia Mason, the lead author of the paper and a professor at Columbia who teaches a course on managerial negotiations. When people use round numbers, by contrast, they’re conveying that they have only a general sense of the market rate for their skills.

…In one experiment, Ms. Mason and her team had 130 sets of people negotiate the price of a used car. When buyers suggested a round anchor, they ended up paying an average of $2,963 more than their initial offer. But buyers who suggested a precise number for a first offer paid only $2,256 more, on average, than that number in the end.

When it comes to negotiating salary, Ms. Mason’s research indicates that a job candidate asking for $63,500 might receive a counteroffer of $62,000, while the request for $65,000 is more likely to yield a counteroffer of, say, $60,000, as the hiring manager assumes the candidate has thrown out a broad ballpark estimate.

There is more here,  Mason’s home page is here.  The paper itself is here.  Here is her TEDx talk on mindwandering.

1 Bill June 3, 2013 at 8:22 am

If you want to give the impression you are on sale, at a one time bargain price, use $64,999.99 as the starting offer and wear a flasing blue light on your cap.

2 dan1111 June 3, 2013 at 8:59 am

+.99

3 Bill June 3, 2013 at 8:32 am

Seriously, though, if you want to get your number, make it less focal and more complex: starting offer: $65k starting salary, with $3k signing bonus, $4k health benefit contribution, yada yada. It is easier to drop a category while maintaining the reference price of $65k than it is bargaining within a category. And, since it is hard to bargain within a category (eg, health benefit contribution), that may stay as well. Also, the hiring person, if they want you, can tell the person I hired so and so for $65k without telling the superior, “I also gave him/her a benefit package of $x”.

4 dan1111 June 3, 2013 at 9:00 am

But wouldn’t the above advice still apply?

Shouldn’t you ask for a $65,200 starting salary, a $2950 signing bonus, and $4218.72 health benefit contribution?

5 Mark Thorson June 3, 2013 at 9:24 am

Why limit yourself to rational numbers? Throw in pi and the square root of two if you want to really impress them that you’ve worked out the exact value of the goods in question. Be careful about valuations in terms of the square root of -1. Not all banks know how to cash a check for an imaginary amount.

6 MD2 June 3, 2013 at 9:30 am

Actually, banks are completely familiar with imaginary money. They just don’t want to admit that’s the only kind there is.

7 Ron Paul June 3, 2013 at 9:38 am

That’s why the first thing I negotiate is that my salary can be paid only in bars of gold.

8 dead serious June 3, 2013 at 7:30 pm

I only accept Bitcoinage.

9 zbicyclist June 3, 2013 at 11:11 am

And should an employer looking for math gurus advertise like this?

https://fbcdn-sphotos-h-a.akamaihd.net/hphotos-ak-ash3/942989_10152801745215343_603048545_n.jpg

The overly-precise strategy might work in the lab or in a one-time transaction like buying a car. But as an employer I’d be worried that I would be hiring a nitpicker. I want people to be detail-oriented about the important aspects of their work, but I do not want someone who adheres to the precise wording of the employee manual (particularly if they would be supervising other professional employees!), and who might labor too intensively over the minute, less important details of their projects and miss the big deadline.

In short, the signalling effect of this strategy would be highly negative for me in the hiring decision — and isn’t that the important decision here?

10 dirk June 3, 2013 at 2:20 pm

It would signal that the individual is money-motivated. That may be a red-flag in some fields, in others that’s exactly the sort of employee you want.

11 Bill June 3, 2013 at 3:50 pm

dan1111, good additional point.

12 Chris S June 3, 2013 at 9:55 am

Did a correlation-causation problem just pass the great MR filter?

People who understand non-round-number anchoring are very likely better negotiators overall and will have more favorable outcomes generally.

13 dan1111 June 3, 2013 at 10:33 am

They were controlled studies in which a round or precise starting number was assigned to each participant.

14 Chris S June 3, 2013 at 11:39 am

My faith is restored.

15 Rich Berger June 3, 2013 at 11:55 am

So now that this is in the WSJ, can we expect a trend to non-round salary demands?

16 Kevin Dick June 3, 2013 at 1:38 pm

I remember getting this exact advice from Amos Tversky in a graduate school class in 1990

17 dirk June 3, 2013 at 2:03 pm

Robin Hanson had a post a few years ago which touched on this subject without realizing it:

*Detail Is Near*

“A pilot tells me that we naturally tend to judge how far away things are by how much detail we can see on them. He says that this leads to a bias whereby pilots overestimate how far away is the ground at night, and when water is flat and calm.” http://www.overcomingbias.com/2010/08/detail-is-near.html

Similarly, when negotiating, if you ask a price with a more detailed number the other party will assume that we are close to the ground. Most sales professionals are taught this tactic.

18 Nathan W June 4, 2013 at 8:31 am

I quote on the basis of a very specific formula but mention round figures, but invoice on a very approximate basis depending on of how much work the project seemed to be and how hard I think it would be to find someone else to do that job.

I usually invoice less than I quote, unless legitimate complicating factors come up, then I invoice more than the quote. The use of round numbers makes my life easy, but I always refers to industry-standard formulas to illustrate that the price lies within a competitive range.

I will remember to use more detailed numbers in the first quote for new clients.

Example:

Translation charges:
– $0.09-0.12 per word
– 8612 words
= $900 (specialized content (+), flexible deadline (-))

19 Nathan W June 4, 2013 at 9:07 am

I should then quote $1033.44 and mention that I might charge less if things go smoothly. I also provide a link to lots of information about the kinds of things that make it more or less work for me to translate a document. I believe that this approach encourages clients to find their easiest ways to make my life easier, thus saving everyone time, effort and money. However, if it’s all about me making their life easier, then I save their time and effort and make more money for doing so.

I also refer them to the competition, which I believe makes it more likely that I can work on my terms. I’d like to go so far as to plug http://www.proz.com/profile/1462039.

20 Nate June 4, 2013 at 9:40 pm

I actually got my job for the answer to the salary question. I asked for six million Swedish Krohner and a pet skunk. And followed that with …given education and prevailing wages, what’re you you offering? By the time I got to the office people were already whispering, “that’s tho skunk and Krohner guy”. The smaller I offered was good enough that I’m still there.

21 Nate June 4, 2013 at 9:41 pm

Ahem, salary.

Comments on this entry are closed.

Previous post:

Next post: