Anchoring in Negotiation

Anchoring in Negotiation

How much to pay to settle a dispute or purchase an item or settle a dispute is one of the most important decisions to be made before bargaining begins. A great many factors will influence the decision.  Someone considering settlement will take into account, among other things:

  • The need to preserve a relationship with the other party;
  • Disruptive effects of the dispute;
  • Likelihood of success at trial;
  • Likely recovery at trial;
  • Possible amount of adverse verdict;
  • Cost of litigation.

Determining the price of an object is similar. One takes into account:

  • The relative need for the item;
  • Alternative sources of supply;
  • The price of similar goods;
  • The condition of the item;
  • Features that make this item more or less desirable.

These are all logical things to consider when choosing what to pay. We like to think of ourselves as rational beings. If I were to add to these factors “a random number you said before bargaining,” you would surely tell me this had no relationship to value, and could not influence you. You would be wrong. 

The fact is, humans are inherently irrational and limited. Proof of this is the existence of cognitive biases, which are unconscious flaws in our thinking arising from problems in memory, attention, and other mental tasks.

Cognitive biases result from our brain’s efforts to simplify the complex world around us. They affect us all, and if we understand them, we can sometimes use them to our advantage in negotiations.

The anchoring bias 

In one psychological experiment, subjects were asked to provide the last two digits of their social security number. They were then shown a variety of items, such as wine and chocolate, and asked and asked how much they would be willing to pay. Those with higher numbers consistently said they would pay more.

This is an example of the anchoring bias, a cognitive bias that causes us to rely too heavily on the first piece of information we are given about a subject. When we are setting plans or making estimates about something, we filter new data from the perspective of our anchor, instead of viewing it objectively. This can impair our judgment and keep us from adjusting our plans and forecasts past what we should.

Anchoring is extremely difficult to avoid, even when numbers are obviously too high or too low, or obviously have no relation to the subject under consideration. Significantly, the phenomenon occurs even when subjects are warned about the bias and cautioned to avoid it. Because anchoring is universally predictable (however irrational it may be) a good negotiator can use it to influence the size of the bargaining zone. That said, every competent bargainer must know how to effectively set anchor points, and how to respond to the other side’s anchoring.

Why does anchoring occur? Generally, cognitive biases are shortcuts. Kahneman and Tversky theorize that in conditions of uncertainty, we use anchoring as a starting point and adjust to a more realistic outcome, but fail to adjust sufficiently, especially if we are mentally fatigued, drunk, or distracted.

Another theory suggests that anchoring causes us to reset our expectations in response to the anchor.  That’s why auto dealerships put the most expensive hires at the front of the showroom. Everything else seems to be by comparison. 

Professor Adam Galinsky of Columbia University believes the origin of the anchoring bias is attention.    Low anchor points focus subjects on the negative attributes of an object; high anchor points focus them on positive attributes. Whatever the cause of the bias, anchoring effects experts and laypersons alike. It has been shown to affect judges in the imposition of sentences and real estate brokers in the pricing of homes.

Setting effective anchor points: In any negotiation, there is a range of numbers (or a set of conditions, where money is not the primary factor) upon which the parties could reach an agreement. (For instance, a used car might sell for between $15,000 and $20,000. This range is the Zone of Possible Agreement (ZOPA), sometimes called the bargaining zone.  Successful anchoring may or may not change the parameters of the bargaining zone. It does move the end result in moving the end result of the negotiation process closer to the anchoring party’s ideal outcome than it otherwise would be.

How does a negotiator effectively take advantage of this cognitive bias and anchor his or her opponent’s expectations? Do they make the first move in the negotiation? How do they decide what size demand to make?

One of the most contentious questions the negotiator faces when sitting down at the bargaining table is whether or not to make the opening move.  For decades, the conventional wisdom has been to allow the other party to go first, in the hope that he or she would disclose useful information about important interests while doing so.  Since both parties often had the same idea, the first part of the negotiation was often an uneasy little dance while the parties tried to gather information without disclosing anything disadvantageous. 

Anchoring appeared to change those incentives, as a series of experiments by Galinsky and Mussweiler showed as between a buyer and a seller, whichever one went first achieved a better result. They also showed that the initial anchor has a strong impact on the final price paid. These results would indicate a move-first, anchor-aggressively strategy every time.

 Not everyone agrees with this approach, however. Harvard’s Program in Negotiation staff points out that if one lacks information regarding the boundaries of the Zone of Possible Agreement, an extreme opening offer is risky. It may be so far outside the other party’s perception of the ZOPA that it convinces them no agreement is possible.  Even if an overly extreme demand does not derail the process, if it is seen as manipulative or foolish it may damage your credibility with your negotiation counterparts. . Further, a demand that is too extreme will not anchor expectations. It will simply be disregarded and of no effect.

How extreme an anchoring demand is too extreme?

Negotiation often puts a premium on aggression, especially in the anchoring context. After all, we want to anchor the other party’s expectations as high as possible without derailing bargaining or damaging our reputation.  To do this we need as much information as possible about the other party’s ZOPA.  Knowing about the subject under negotiation, the individual or organization involved, their needs goals interests, and challenges, the typical costs associated with a negotiation like yours, the parry’s resources, and any other relevant data you can obtain.  The purpose of the information gathered is to enable predictions of the ZOPA.  The ideal anchor. This number should be as close as possible to the other party’s reservation point, or bottom line — the point at which your counterpart would prefer to end the negotiation than settle. By design, this is the far edge of the bargaining zone (ZOPA).

Of course, it will probably be difficult to determine the reservation position. It is not information that is typically shared because it allows one party to maximize recovery at the expense of the other. Sometimes it is possible to determine when someone is approaching the reservation point by observing their bargaining behavior, but this is uncertain and comes too late in the process to be of use. All but the most fortunate bargainers will have to do the best they can with careful advance preparation.

Given that lack of familiarity with the bargaining zone can have serious consequences if a negotiator accidentally steps outside the ZOPA with an extreme anchoring offer, some experts recommend using anchors that are less confrontational, but still, effectively anchor the other party. Remember that even the mention of a seemingly unrelated number can trigger the anchoring bias.  So the following types of statements can serve as well or better than risky extreme anchoring offers:

“I understand that candidates with similar training and experience are being hired at salaries of between $85,000 and $95,000” (if you anchor to a range, be ready to respond to an offer at the lower end of it.)

“Since the pandemic hit, we are not getting the service we expect from you. The accountants tell me we should get at least a 15% discount.”

“Is your budget for this project over or under $100,000?

“This is a great system, perfect for your needs. Last week a customer bought one like it for $50,000.” 

These examples allow a negotiator flexibility, introducing anchoring numbers without seeming to interrupt a conversation. They will work well when an extreme offer is risky because of a lack of knowledge of the ZOPA or other factors.

 Defenses to anchoring Inevitably, you will not always be the first to anchor? What can you do to respond to the disadvantage that puts you in?

Counter-anchoring.

When you receive an unacceptable anchoring offer, you must:

  • Immediately reject the other side’s anchor;
  • Simultaneously give reasons for the rejection;
  • Provide a counter anchor:
  • When you decide on the counter anchor, do so in light of the “midpoint rule”: Most negotiations settle at the midpoint between the first two reasonable offers.  

Let’s assume you are negotiating a salary for a new job. The employer tells you that it has $50,000 budgeted for the position. You know your market value is $70,000. You would immediately reject the $50,000 offer and counter with reasons: “I want to work for you but we are miles apart on salary. I have a Masters’s degree and ten years of experience in the industry. I am worth at least $70,000 a year.” According to the midpoint rule, the employer will probably come up to $60,000 a year because of the counter anchor

Considering the opposite.

We have reviewed research showing how difficult it is to avoid anchoring, even when one is a subject matter expert. But though it may be impossible to avoid becoming anchored, it is not impossible to eliminate the anchoring effect. In a series of experiments concerning anchoring, Galinsky and Mussweiler showed that taking into account data that was contrary to the anchor point completely eliminated the effect of anchoring. If you find yourself anchored, therefore, go out of your way to look at contrary data. Galinsky and Mussweiler call this strategy “considering the opposite.”

Perspective-taking 

Professor Galinsky is well known for his work with perspective-taking and creativity. Perspective-taking is the deliberate effort to see things from another person’s point of view. It is a skill that may be learned and improved with the help of a partner. Galinsky reports that like considering the opposite, looking at the negotiation and anchoring from the other party’s point of view eliminated the anchoring bias. The bias is powerful, but not inescapable.

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