Hard Driving a Bargain?

November 30, 2007

 

Guy Le Deley

Guy Le Deley

Attention all car shoppers and home buyers: The give-and-take of negotiating generally leads both parties to believe they strike harder bargains than they actually do. That's because each side misjudges the other's bottom line, according to a report published in the Journal of Personality and Social Psychology.  

Richard Larrick, an associate professor of management at the Fuqua School of Business, and George Wu of the University of Chicago found that, even after haggling, most negotiators—buyers and sellers alike—make a skewed estimate of the size of the pie they're fighting over, thinking it is smaller than it actually is. The pie represents the full range of the possible deal—from the lowest to the highest possible purchase price.

The researchers studied three groups of 156 to 266 students at the University of Chicago's Graduate School of Business, dividing each group into imaginary buyers representing a motorcycle manufacturer and sellers representing a parts supplier. The students bargained for forty-five minutes over the price of the parts.

In the first two studies, the researchers varied either the size of the bargaining zone or each side's expectations about the other's "reservation price." In the third study, the researchers used cash incentives to encourage students to estimate more accurately their opponent's price limit.

In all three studies, the authors consistently found that negotiators underestimated the size of the pie available; as a result, both buyers and sellers ended up overestimating the size of the slice that they captured. The student bargainers left the negotiating table thinking they had captured, on average, 56 to 72 percent of the available pie when in reality, they captured an average of only 50 percent. 

The authors attribute the results to a barrier in learning they call "asymmetric disconfirmation." Negotiators only learn that certain types of judgments are wrong because of the way their counterparts respond in the bargaining process. But other types of mistaken judgment go unchallenged, so the negotiators never find out they were wrong.

For example, buyers who incorrectly believe that sellers will take a very low price will quickly learn that their judgments are wrong because their opening offers are flatly rejected. In response, they inevitably raise their offers and adjust their estimate of the seller's limit so that it becomes more accurate.

But when buyers overestimate the seller's minimum price and start with a generous first offer, the seller may happily agree, and the buyer never learns he could have offered much less.

Over time, the researchers predict, people may become overconfident about their bargaining skills because they usually come away from a negotiation feeling as if they have won, even if they have accepted a less favorable bid than is necessary.