When negotiating a price, never bid with a round number (2016)
hbswk.hbs.edu
hbswk.hbs.edu
The thing I am curious about in [0] is that they report the bid price per share, and not (unless I missed it) the asking price. I don't know how M&A "works". If you and I are both estimating the value of a good, if our estimates are close it's one thing and if they are far apart it's another. Are rounders losing because their estimates are less accurate, relative their counterparty's?
[0] https://www.hbs.edu/ris/Publication%20Files/16-058_27d73983-...
In general it's the buyer who names a price first. Take the current Twitter acquisition, the board weren't trying to sell the company at all and Elon Musk made an unsolicited bid of $54.20/share.
Other times the board may be actively looking for a buyer and have a price in mind, but it will still typically be up to the buyer to propose a deal. Not least because the number isn't the only thing being negotiated: the buyer will likely have a range of stipulations or conditions attached to the bid so every bid will look different.
One would, but the little I've seen & heard about due dilligence around M&A (and startup investments for that matter) tells me it's nothing close to "quant". People decide they want to buy something, and then try to get it for a good price, and try to have it so that due dilligence works to reduce the purchase price, while not actually finding anything to block the deal. Perhaps in public company acquisitions there's more sophistication, but I really doubt that.
This is accurate.
For public companies, the quant part has been calculated by the market. Everything that remains is, almost by definition, in the realm of the irrational, unknowable and/or political (usually at the Board level, though government factors could also be involved).
And then you go on to say "everything that remains is ... in the realm of the irrational", everything you have laid out is in the realm of the irrational. Including the market.
This discussion devolves into useless semantics if we rely on colloquial definitions. In case it wasn't clear, the predictable, explicable parts of a public company's value are generally priced in by the market. (If they're not, we're in a chaotic environment and nobody's doing classic M&A.) It's the other stuff, which we put in a bucket titled "irrational," M&A bankers address.
This is why the cash-flow models bankers prepare are largely performative. Every buyer builds their own models. And most of the time, the market does the modeling for them. The part the market can't model, the things one seeks to do with control, is the main attraction.
I caveated the comment because private company M&A is different. There, the negotiation does focus on valuation. Quality of assets. Current cash flows. Strength of contracts. Discount rates tied to the actual cost of financing versus an MBA model. While public company M&A dresses financial strengths and weaknesses in the language of partnerships, private company M&A seeks to address political issues (e.g. a senile founder with voting control) through talk of fundamentals.
The other side is also not necessarily irrational, but much less deterministic. For example, there is the question if the board even wants to sell, if they like the potential buyer, if they have a vision for the company that aligns with the buyer and some non-tangibles. Charisma projection and speech-craft definitely has an influence too, as has track record.
The more factors are in alignment with the board, the closer the price is to the stock value. The more hostile the negotiation, the more it moves away.
It's Musk, so you can throw out the book. He just takes the stock value and then tweaks it so that the offer contains 420 because obviously that's his shtick since some time.
Wonder if the SEC will ever live that one down.
Musk's Twitter takeover is a textbook LBO transaction. The negotiations were unorthodox. But that's been true of LBOs since the 80s. Usually the bankers were the ones up to the antics; this time it's the principal.
An econ 101 trope about the value of stock ties it to the value of future dividends. This is technically correct, but practically useless. You don't get those dividends unless the Board gives them to you, and investing on the hope that a Board throws you candy is just a hair short of stupid.
The real enforcer of value in the markets is M&A. In M&A, you become the board. If there are cash flows, you can take them. If there aren't, you can't. You're playing a game of looking for things the market and/or management missed or couldn't access. Furthermore, the moment that process starts, the moment negotiations become public, smart people focus on the stock to anticipate those terms. If they think another buyer could see cash flows you don't, they'll bid it up and the Board will take the signal (as will those other buyers and their bankers); if they don't, if post announcement the stock keeps trading below the bid, the Board will take the hint.
That's indeed how it works in my experience. Thay's also why, as a seller, you want to invest a lot of time making sure that the due diligence scoresheet will be as clean as possible - because then, there can be no mechanical way for a prospective buyer to lower the price: only their belief against that of other prospective buyers...
Here's a sales secret: this is how most people and businesses buy things most of the time. Key stakeholders (which may not be the big boss) decide they want something then find reasons to justify it. They'll only abandon the deal if there are true blockers either on price or features. And by "big boss" that can be a parent, spouse, Director, CxO, Board, etc. The buyer decides they want a thing and will set about convincing whoever needs convincing. The more you can make them engage emotionally the harder they'll go on securing approval.
If you're a startup selling to companies have one or two impressive "wow" features to make people decide emotionally they want your product, even if they don't seem like important "bread & butter" core features. It makes the rest of the process a lot easier.
Same goes for selling to consumers or even app videos/screenshots: sell people on your product emotionally within the first 5 seconds if you can.
Yeah, if I say €193,345 and they say €1 million, that last five euro would look a little stupid. This is a scenario where already being close to knowing their closing figure is everything.
The proper analysis here would be: What's the chance you get your <1% edge versus losing a deal by being stuck on a number too early?
> are close it's one thing and if they are far apart it's another. Are
> rounders losing because their estimates are less accurate, relative their counterparty's?
I belive it is normally the one with the most optimistic evaluation that wins. It is called "winner's curse": https://en.wikipedia.org/wiki/Winner%27s_curse
This is really impressive, this works each time. Especially if you are on ski slopes and you have two groups trying to meet at a given point. 10 minutes == "We can do another run or two". 8 minutes == "We need to pay attention, they are coming right now!"
They just round more than you: I think your presumption that others should think like you is bizarre. Some people only round to 10 cents. If you are wealthy enough, you could easily round 10.99 to $0.
What I actually wrote was "bizarre to me", not just "bizarre" (as in your quote), so I don't think it's fair to say that my comment conveyed such presumption
But I live in a very dense city (Chicago), it’s become almost “set your watch to it” reliable that not only are estimates more reliable from friends who live here when they say “I’ll be there in 8 minutes”, they’re also seemingly more likely to offer such a precise estimate because they know the area, light timings, and traffic patterns and that certain kind of behavior found among drivers in this city.
Compared to when I have friends from out of town renting a car they’ll tell me “GPS says we’ll be there in 10 minutes” I instinctively add another 10 and it’s never failed that they’ll show up and go “that was a long 10 minutes!” And I just smile.
It was practically a given that the first time someone visited they would arrive 15-20 minutes later than they estimated. It seemed like an area without a lot of traffic but it was in that uncanny valley where there’s enough traffic where you catch a lot of lights, and you aren’t turning right on red because there are people in front of you, and you may or may not make the left turn light on the first cycle.
Also the whole city is so tuned for one direction of traffic that it takes longer to go across the narrow dimension than the long one.
There was a movie theater that I found I could reliably get to faster on a Friday evening if I drove five blocks past it and doubled back, the lights were that screwed up. 15 blocks faster than 5.
Suggests people think of their commute as 20 plus a few minutes but rounding down optimistically, or think of it as almost 30 minutes rounding up angrily, never think of it as 27 minutes.
No writeup of the commute data has mentioned this phenomenon, which I suspect was exactly the same thinking you describe.
https://www.census.gov/content/dam/Census/library/publicatio...
15 to 19 minutes . . . 14.9%
20 to 24 minutes . . . 14.1%
25 to 29 minutes . . . 6.6%
30 to 34 minutes . . . 13.9%
// Noticed this while researching for a comment on HN a few weeks back.
Unless you're talking to a child who has not yet internalized this distinction! My kid frequently asks exactly how much time has passed, and I sometimes have to explain that I don't mean five minutes literally, but figuratively.
Is the presumption that a "quant" bases their decision on logic alone and that's why they wouldn't be susceptible so social psychology? Maybe someone with more background can elaborate but I think behavioral psychology might refute that assumption.
If you're a manager involved in some bidding process, what this article is telling you could be somewhat loosely rephrased as "use the Excel numbers rather than the ones that stuck in your head after the presentation", which is interesting advice.
I received a job offer while my wife was traveling. The number was right for me and the job/company was right. But I told the hiring manager that I needed to talk it through with my wife first and that I'd need a few days (no context about why I needed the time or which direction I expected it to go).
She got home 3 days later. We sat down, talked it through for 10 minutes, and we were ready to accept.
In the time between the initial offer and accepting the offer, I received 3 updated offers with increasing compensation. The final offer I accepted was $75k higher than the initial offer.
After experiencing that, I've noticed companies use this tactic frequently. When you call into a help center, often times the phone operator "will need to talk to their manager" who is authorized to make the actual decision. You aren't allowed to talk to the manager - all communication goes through the intermediary. I suspect they are aware that this is an effective negotiating tactic.
This is why every dealership salesman "has to go talk it over with his manager" at some point in the negotiation.
I doubt this would work in any other context because the sales / negotiations are less in-person (e.g. buying a house, where you only really go through your realtor I think; idk still haven't bought yet...).
- If you offer £210,000, it's a signal that you're looking at increments of £10,000.
- If you offer £211,000 it's a signal that you're looking at increments of £1,000.
- If you offer £211,000.01 then it signals that you're taking the piss.
I'm sure there's something about confidence and accuracy in there too, but I would expect anchoring effects to be stronger in those contexts.
showing prices without vat should be banned for sales that are never business-to-business.
* unless they also vary wildly by the week
As long as there are still people negotiating this way, then it is rational to assume that people negotiate this way some proportion of the time and account for it in your own strategy. It's probably not stable in general.
Now, I wonder how long it will take for auction systems to start suggesting this type of bid and ruining the strategy so we need to find another strategy...
To be honest, the immediate issue that is already there in this very moment is that more and more people no longer sell their stuff as regular auctions on ebay, but as completely overpriced fixed-priced offers. This is the main distinguishing factor for me between using ebay ten years ago and now. If everyone starts doing that, the best bidding strategies become useless.
It's just a weird thing to say to the BUYER, "ah, but did the SELLER look into your finances before they took your bid"
It's a losing strategy.
I found I was much better off if I could give the other side real wins.
Especially in repeated games.
Single-round best strategy is squeeze and defect.
Good negotiators find trades that are valuable for both sides of the table. That's how you negotiate well.
That does not sound realistic for a normal-homeowner U.S. real estate sale. There are generally two Realtors and a title company as professional intermediates in the transaction. The seller may only know the buyer's name if the seller spends time reading routine paperwork - which those intermediates create and handle. Why would the XYZ agents visit the seller - when the buyer's Realtor, buyer's bank, and title company have so much more information, insight, and experience on the matter?
I can see it as buyer (you want a house, not a title insurance claim). But as seller...even having your own atty. involved seems pretty odd. It's the job of the Realtors, title company, and bank(s) to judge the buyer's money, and call it good or bad.
(Or did someone offer to buy your acquaintance's house, with no intermediaries, for a briefcase full of cash? That raises enough red flags that you could host a birthday party for Karl Marx.)
Another tidbit: in NYC, most people use an agent when they rent an apartment. They charge one month’s rent.
It also helped the owner had been moved by his job, and was looking to get out of the house ASAP.
Often bond dealers will put out “bid lists” to customers or other banks of relatively illiquid bonds and ask for competitive bids for a handful of bonds. Invariably the buyer with the winning bid on a bond would ask “What’s my cover?”, that is “How much more did I pay than the next best bid.”
Importantly, there is no legal obligation to tell the them or especially to tell them the truth, and invariably the response would be “a tick” (1/32). The only time I’ve heard someone say someone tell the truth with bad news for the customer was “No cover - you were the only bid.”
> I'm so happy they took this unrounding advice in the other direction :-)
they went up, the others went down.
But to be honest I'm not sure what they were attempting to signal with 699, that's a sales strategy to make the price appear lower, surely you want it to appear the opposite. I guess some people copy strategies without understanding them.
Other bidders aren't making the decision to sell. The seller is. $701k might deter a seller countering a $700k bid with $735k (5% more).
1. Set a bid due date 2. Ask three best offers for their "Best Final Offer" 3. We increased our offer (50k 1st case which was generous, 150k second case) 4. Lost, move on to the next showing. In the second case our BFO was 400k over asking, ultimate winner offered 600k over asking. Insanity.
When I sold my house in TX I also did the same: got two offers almost immediately after putting it on the market, so we went back to the buyers and asked for BFO. Both increased their offers.
Funny enough for our third winning offer we saw it the day before the Open House (which just started being allowed again) and put in our offer the day of the Open House. Won for around 50k over asking. I'm not 100% sure but from what I gathered an investor who wanted to rent it as an upstairs/downstairs duplex offered more but they wanted to sell to another family so they took our offer without asking for more money. I was very thankful for that - if they had come back asking for better offers we'd have walked.
If sellers got more money by listing their homes for $1, they'd be listing their homes for $1.
It could also be that the buyer couldn't stomach paying 700 for the home, so they used the sales strategy on themselves to justify the price.
That's assuming the $699k bid isn't entirely fictitious, which it probably is. Both agents have an incentive to make the buyer feel good about the transaction and not like they overpaid when they did.
but of course, Nash equilibria don't always line up well with human behaviour. for the 2/3 game there's empirical work showing that the best strategy against inexperienced players is betting somewhere around 20 iirc. would be interesting if there are papers that would give a similar rule of thumb how much of a "premium" you should offer over the nearest sensible round number
The precise number indicates confidence in my research and it gets past the other person's resistance point. They focus on the weird number rather the actual round amount. "And four hundred dollars? laughs I'm sure we can do that."
This is also a stronger negotiation tactic than asking for the whole amount. They offer 180k but you really want 210k? "To make me feel comfortable I'd need to see that number adjusted by thirty four thousand and six hundred dollars."
I am on the fence about numbers that are alliterative. They sound good, but they let people latch on to the sound which you don't want. You want them focused on the smaller number and get them to say "yes" to that, because then their brain won't let them say "no" after they've thought about it. In their mind, they are committed to that course of action then.
Also works for buying anything that you have to haggle over, like antiques, like the glass fronted antique cabinets we want. Four of them. $11,200 in total according to the ticket price. "Would you be willing to throw in all four for $8,760?" Slaps hand on desk as I say the final number. Sold! Lowest they could go was $10,500 just moments before.
Works every time, ninety percent of the time.
ITYM 91.4% of the time
Another study I read some years ago that I can probably never find again, but I am sure you are already aware of because you seem interested in this sort of thing, showed that by quoting the p value as less than 0.1% added unsubstantiated authority to the numbers.
Anecdotally though I prefer putting the statement about the p value before the statistical number.
Some guys out of Harvard, for their final year thesis that got some massive government grant demonstrated that bequeathing knowledge on the other person in the form of positive attributes, such as already having read a study, increased the chance that your statements would be believed. Especially if you use mirroring and nod as you are saying it so that they nod, and thereby agree, along with you.
Also, throwing in the fact that you personally disagree with the study you read, or point out that you think the methodology employed had some flaws, or that the results were not as conclusive as the authors claim, adds even more authority to your citing of the study.
> demonstrated that bequeathing knowledge on the other person in the form of positive attributes, such as already having read a study, increased the chance that your statements would be believed
Well now.
You can laugh at it, but this stuff actually works.
So Three Hundred and Twenty-two Thousand, Four hundred Fifty-Four.
I want thirty-two-thousand and nine-hundred dollars.
I want thirty-four-thousand and one-hundred dollars.
The human brain is good at picking up on alliteration, you don't want them focusing on the alliterative number, you want them focused on the smaller "hundred dollar" number.
Unless your hundred dollar number is alliterative. I want thirty-four-thousand and twenty-two dollars. But generally I only use that when buying antiques.
I always wondered what part of my tactic worked the best... I wasn't sure if it was setting the oddly specific price or my terseness or maybe both.
I wonder if the second salesman assumed you had already shopped around and found a car of similar price to your offer.
FWIW, I've always loved the Insight and wish they made more of them :-)
I tried to lease a car last year and after some research knew what was a fair price for a well stocked model; when I suggested a range one sales manager laughed at me.
I emailed a finance manager at a different dealership with exactly what I wanted and told him I could get all of the paperwork done in the next hour if it was a good fit. They agreed and dropped the car off in my driveway a few days later.
My friend who's family runs a dealership says that just getting MSRP is good right now. In my negotiations I got MSRP plus the stupid dealer installed "options" which apparently are mandatory now. They were asking $34,000 out the door total price and I got them to knock off $2000.
Did I get a good deal? Who knows? I need a car and I'm getting it.
I have to admit, I'm looking forward to the new gadgets like automatic lane centering.
why would you come up with some to-the-$1,000 asking price in a salary negotiation rather than just asking for 30% more than you'd be okay with?
i know he has another version where at some point in the negotiation (rather than the beginning), you whip out some very precise number, but that would immediately strike me as a psychological play rather than the honesty/thoughtfulness it's designed to convey.
in a different situation it's certainly more effective, like when requesting a budget/expense for a specific project, since it signals you've done the math and not just throwing inflated approximations.
I have always used the "imprecise offer" somewhere in the middle, and it usually worked out great.
This is like saying "I avoid companies run by humans".
The book also mentions anchoring should usually be avoided in negotiations and instead it recommends you focus on the non monetary value points each party can exchange.
There is actually a section on negotiating salary and IIRC it recommends you provide a range where the bottom of the range is where you are hoping to land.
So you are correct - I would never say in a salary negotiation that I need an exact dollar amount as it might make me love petty unless I prefaced it with 'I have a family to feed and a roof to put over our heads'.
If you ignore the stuff your linked comments complain about, which is largely him having an obnoxious writing style and literal too-cool-for-(Harvard)-school attitude (them nerds don't know nothin'!), I found tons of the actual content immediately applicable with lots of return.
The thing I absolutely loved about the book was shifting your mindset away from negotiations being these big scary stressful standoffs with winners and losers, and towards them being lighthearted, possibly even fun(!) shared problem solving sessions. That mental shift, and having a box of tools to use, makes navigating tricky situations so much easier.
It also make me look forward to previously stressful situations. For instance, I recently bought a new car, which is a process I usually loathe. However, using all the tricks from the book, I was able to negotiate down a crazy amount off our car with the main approach being the "how can I do X?" from the book. There was some back and forth, some huffing and puffing about how it couldn't be done ("we're already taking a loss on this!"), but eventually, after numerous showy checks with the management, we agreed on a price. I legit had a blast the whole time cause the mental state the entire time was "can we solve this problem together?"
It's not that these numbers are magical in any way, it's just that for me it's convenient to have a rule ready so I don't have to expend mental energy on what numbers to say, and I can instead use that energy on coming up with how to present them.
Knowing the steps I'll take to the final offer ahead of time also makes me slightly more comfortable entering such a low bid to start out with.
I read "How to Measure Anything in Cybersecurity Risk" but the relevant concepts are from his original book:
- every measurement is an approximation
- you can determine a more accurate valuation (or probability) by thinking in terms of bets
The book isn't primarily about negotiating, but it is about estimating based on incomplete information, which applies to all negotiations. Avoiding a round number doesn't need to be arbitrary. By calibrating your estimation process you can come up with a more precise number, which can also boost your confidence.
The result is both having a more specific valuation in mind, and being more comfortable with the outcome regardless of whether the deal worked for fell apart.
1: https://www.howtomeasureanything.com/books-by-douglas-hubbar...
...he accepted my offer. :)
Of the 5 services that we provided to the client, there was one service that was very demanding. Suffice to say, it took us several years to get it off the ground and stabilize it. All that knowledge and experience made us a valuable extension of the client. We both had the battle scars. This service was only 10% of the total billing from this client, but very high maintenance, highly visible and operationally very challenging.
When it came to the reverse auction, we dropped our price on this service marginally and held our price on all other services.
A feature of the realtime reverse auction was that we would know our rank amongst competitive bidders on where our bid stood. So, it was nerve-wracking to know that we are not the L1 bid.
We retained all our services at the pre-bid volume levels at the conclusion of the reverse auction and continued to grow this client account for another 5+ years. While this is a single anecdote and may not apply in all scenarios, complex bids don't always come down to price.
Similarly, those who chose hole number prices likely did NOT use a model to determine that exact price (as the odds of a model resulting in a whole number price is extremely unlikely).
Thus, you cannot disentangle the effects of the precise bidders actually being more quantitative from the perception of them being more quantitative by the seller.
To properly disentangle this, you would need an experiment (or potentially quasi-experiment) where you randomize either adding some noise to the bid for some bids and rounding other bids to whole dollar amounts.
Is it noisy outside? Is it warm in the winter? summer? Does sunlight pose problems (too much? not enough?) What taxes are there? Is there an HOA? Is the town growing? Is it in a walkable neighborhood? What amenities are nearby? What color is the counter?
Insufficient models was the bane of Zillow, which paid for it dearly.
https://www./live/2021/11/02/business/news-business-stock-ma...
I say might because they count from 0, so technically it’s 38 signals ;).
pretty sure they forced it to fit, probably by padding the list.
“$153,845.64”
Anybody ever tried that?
>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.”
So I think $153k is an ok level of precision. $153,900 is starting to be “too precise”. $150k is definitely too round. It’s all a personal judgement call on how precise one should go but I think it’s easy to see what is too extreme (with cents in it in this case).
Could've just been a coincidence. But it did get their attention, for sure, because after they gave me the money, they asked why I was so specific on the price. Got an appreciative chuckle when I told them the truth.
For instance if the asking is $125, I'll offer $120 since I don't want to find a $5 bill or make the person find change for the extra $20 bill I'd have to use. I've even rounded up a few times to make it easy, though some people have been so insistent that they even resorted to giving me quarters.
1: https://www.goodreads.com/book/show/26156469-never-split-the...
It gives a feeling that they're slightly cheaper than the competition, I think. Even if the more significant digit is more expensive sometimes, people don't remember that part as much because it varies from day to day.
I'd wish Apple cut the crap on that, it makes them look like you're buying stuff from a used car lot.
You’ll never see decimals in a fancy restaurant for example.
Thus $15.20 vs $15.40
Seems like there are cheaper ways, but maybe the price cuts back on secondary labeling or sell association, ultimately saveing personnel time, which ultimately costs less than those expenses.
It's a great museum by the way.
Edit: apparently it is not just tourists: https://www.strategy-business.com/blog/The-Psychology-of-Pri...
I think it has less to do with something sounding more precise than it does with the fact that, in the real world, actual costs are only rarely a round number. As such, if there's a psychological association of non-round numbers sounding more precise, it's because non-round numbers are actually much more common. This means if you provide a round number bid, you are in reality more likely to have given a value that is incorrect.
But then the article opens with 'anyone negotiating to buy a car, a house, or even a company'
Seriously?
Someone who is very precise in their measurements and measures Mount Everest to be 29,000 ft has a figure that is less "precise" than that of someone who is sloppy and arrives at 29,001 ft (though both are, of course, less precise than the person who comes up with 29,000.482712...).
I made an offer at 800k€. The broker literally insulted me. We settled at 825k.
Pricing is a tricky process of course, but you also shouldn't be over paying or under charging if selling. It's perfectly ok to get cut out of the process in those cases.
I'd rather work with round numbers and settle things verbally or in paper than having to use a calculator like a nerd.
https://www.forbes.com/sites/tomiogeron/2012/04/09/facebooks...
Now when it came to grant writing, I was definitely a little more prone to trying to make the numbers look specific out the gate. “I need $10,000” sounds like a gut number regardless of context, so in a case that really was the estimate (it happens!) I’d say “$9,850” or something. Usually a 10% misc/“the unexpected” line item took care of it though.
Why the hating on nerds?