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.
“If one party gives a round number, it gives the signal that the party doesn’t really know what it’s doing”
“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.)
The most rounded bids (made at the share-price precision of $5 or $1) were associated with announcement returns of 0.1 percent and 0.2 percent, respectively. Bids made at a greater precision generated returns 2 to 3 percentage points hig
