Round numbers in negotiations: A new study shows how they're useful and perilous.

When Negotiating a Square Deal, Be Careful With Round Numbers

When Negotiating a Square Deal, Be Careful With Round Numbers

Moneybox
A blog about business and economics.
June 23 2015 9:36 AM

When Negotiating a Square Deal, Be Careful With Round Numbers

negotiation
Round off at your own risk.

Dragon Images/Shutterstock

In the world of head-to-head negotiations, the person who first suggests a dollar figure must do so carefully. The opening episode of Slate's Negotiation Academy (a podcast series I co-hosted) addressed this concept, with behavioral economist Dan Ariely explaining the importance of "anchoring": If I'm selling you a used curio, and we’re haggling over it, and neither of us is exactly sure what the curio’s proper value is, I'm better off naming an extremely high number right off the bat—instead of waiting for you to make a (presumably much lower) initial offer. By acting first and throwing my inflated number out there, I can psychologically "anchor" the bargaining around it. It's a powerful tactic that gives me an advantage as the negotiation proceeds.

Seth Stevenson Seth Stevenson

Seth Stevenson is a frequent contributor to Slate. He is the author of Grounded: A Down to Earth Journey Around the World.

Now comes news of some further tactical wisdom regarding initial prices. A paper released Monday by the National Bureau of Economic Research argues that significantly different negotiation outcomes will result if that initial number I put forth is a rounded-off figure (such as $500) as opposed to a more precise amount (such as $498.92). The study found that, in an online bargaining situation that mimicked a traditional, back-and-forth negotiation, setting my initial price as a round number was likely to net lower counteroffers (5 to 8 percent lower, on average). But those counteroffers came more quickly (6 to 11 days sooner), and the probability of an actual sale was increased (it was 3 to 5 percent more likely that an agreement would be reached).

Advertisement

This is not the first time that round numbers have come under scrutiny. In a 2013 interview with NPR host Robert Siegel, Columbia Business School professor Malia Mason—using data obtained in part from Zillow real estate listings—suggested that the use of round numbers in a negotiation is generally a sucker’s play:

SIEGEL: And first, give us an example. What do you mean, don't pick a round number?
MASON: So if you're negotiating for, let's say, a car, you're buying a used car from someone, don't suggest that you'll pay $5,000 for the car. Say something like, "I'll pay you $5,125 for the car," or $4,885 for the car.
SIEGEL: Why should that be a more successful tactic of negotiating?
MASON: It signals that you have more knowledge about the value of the good being negotiated.
SIEGEL: Somebody says 5,000 to me and I think, ah, they don't know much. But if they say, $5,123.50, I think, boy, they must have looked up some table of the values of used cars, or something.
MASON: Correct.

But in their NBER paper, researchers Matthew Backus, Tom Blake, and Steven Tadelis note that posting a round number has uses, too. There seems to be something about a round number that indicates a seller’s willingness to bargain. The authors of the study term it a “cheap-talk signal.” Buyers pick up on it. So the resultant agreed-upon price might be lower, but the offers come quicker and a sale is more likely.

Feel free to apply this wisdom to your next negotiation session. Are you a seller who absolutely needs the sale to go through, needs it done quickly, and can afford to sacrifice a little on the price? Then go ahead and round off.

No word in the study on how this technique interacts with anchoring high, but it does seem possible to name a number that’s both lofty and round. Just ask Dr. Evil.