What exactly is anchoring in negotiation, and how does it play out at the bargaining table?
Consider this anchoring bias example from Harvard Business School and Harvard Law School faculty member Guhan Subramanian. While running a negotiation simulation in one of his classes, Subramanian noticed that one student spent a considerable amount of time explaining why $10.69 per hour would be an impossible wage rate to offer the student’s counterpart. The final deal price? $10.69 per hour.
Now try to imagine that you are about to enter a job interview hoping for a salary of $75,000, based on your past experience and industry standards. If you are only offered a salary of $45,000, you may find yourself making a counteroffer of $55,000—which is far less than you think that you are worth. Due to the other party’s first offer, the possibilities for an agreement have narrowed in your mind.
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What is the Anchoring Bias?
A well-known cognitive bias in negotiation and in other contexts, the anchoring bias describes the common tendency to give too much weight to the first number put forth in a discussion and then inadequately adjust from that starting point, or the “anchor.” We even fixate on anchors when we know they are irrelevant to the discussion at hand.
Economists Amos Tversky and Daniel Kahneman first documented the anchoring bias in an experiment involving a roulette wheel marked with integers ranging from 0 to 100. Each participant witnessed a spin of the roulette wheel. They were then asked whether they thought that the percentage of United Nations member countries that was from Africa was greater or smaller than the number spun on the wheel. Next, they were asked to make an estimation of the true percentage.
Participants who saw the wheel stop on the number 10 guessed, on average, that the actual percentage of African countries belonging to the United Nations was 25%. By contrast, those who saw the wheel stop on the number 65 guessed, on average, that the percentage from Africa was 45%. In the experiment, a clearly random number nonetheless had a dramatic impact on people’s judgments.
Even experts, such as real estate agents, can be powerfully affected by anchors in negotiation, research shows. Why are anchors so effective? When conditions are uncertain, high anchors draw our attention to the positive qualities of the item or individual (as in the case of a salary negotiation) being discussed, and low anchors draw attention to flaws, according to Columbia Business School professor Adam Galinsky.
Dropping Effective Anchors
Research on the anchoring bias has shown that negotiators may be able to gain an edge by making the first offer and anchoring the discussion in their favor. The decision of whether to make the first offer generally should be based on two factors: your knowledge of the zone of possible agreement, or ZOPA—that is, the range of options that should be acceptable to both sides—and your assessment of the other side’s knowledge of the ZOPA.
When you believe the other party likely knows more than you do about the size of the ZOPA, you will have difficulty anchoring effectively. Before dropping an anchor in such situations, arm yourself with as much information as possible.
If both sides have a strong sense of the zone of possible agreement (ZOPA), as in the case of a longtime relationship between a supplier and customer with open books, anchors are unlikely to have a strong impact.
If neither side knows much about the size of the zone of possible agreement (ZOPA), you may be able to effectively drop an anchor, though you could risk being too concessionary or too demanding.
If you know a great deal about the asset up for discussion, you can make an aggressive first offer with confidence and expect that your offer will anchor the discussion to your advantage.
Dealing with the Other Party’s Anchor
What should you do if your counterpart drops the first anchor? The first and perhaps most important step is to recognize the move, according to Subramanian.
A common mistake is to respond with a counter¬offer before defusing the other side’s anchor in negotiation. If someone opens with $100, and you want to counter with $50, before presenting your number you need to make clear that $100 is simply unacceptable.
Defuse the anchor clearly and forcefully: “I’m not trying to play games with you, but we are miles apart on price.” If you don’t defuse the anchor first, you are suggesting that $100 is well within the bargaining zone.
After defusing the anchor, move quickly to your counterproposal, with the caveat that mentioning the anchor explicitly and repeatedly might validate it. Then, when making a counteroffer, be sure to explain why it is fair and justifiable.
How do you react if someone drops the first anchor in a negotiation? Share your bargaining table tips in the comments.
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Typically when I’ve seen parties propose an initial offer well outside of the acceptable range, it stems from parties focusing on what’s desired (negotiation goals) instead of focusing on relevant data to support their offer. We can usually bring the offer back into range by exploring and dissecting the rationale supporting the offer. It takes time and a lot of conversation, but anchoring to relevant data helps in many cases. Because many parties are unwilling to “bargain against themselves,” the relevant data conversation offers some face saving to help reach agreement.
Ask for the basis for the anchor—e.g., “Can you tell me how you came up with that number?” This may shift the negotiation towards a more principled approach that involves using objective criteria to develop a range. Or it may prompt the anchorer to try again, this time with an anchor closer to where you want it to be.
My assumption going into a negotiation is that both sides know their boundaries and those externally established, and both want an outcome they feel good about. If the anchor is outside target boundaries, then the first step is to move it into range. Once within the acceptable range, then negotiation grows around common objectives, risks, etc. to strengthen the foundation, then to obstacles. Hopefully, by this point, both parties are working toward a common outcome. Terms are generally more important than money, and each side cares about them differently. Understanding terms allows both sides to get as much of what they want as possible, so both sides win and can live with the outcome over time.
When I am facilitating a negotiation, I create a safe place (usually a flip chart) to ‘park’ opening gestures like an offer that could anchor the negotiations and I give that flip chart a neutral name such as, “Initial Thinking.” Then I go immediately into asking others in the room to ‘brainstorm’ (I usually use that word to avoid terminology like “counteroffer”). Then, when the list is fleshed out, I ask the group to reflect on the list as an idea board and propose solutions that will work for everyone, at least good enough. It never goes this smoothly, but that is the logic path that seems to help ameliorate an instinct for zero-sum negotiation tactics.
When someone drops an anchor, I typically will dismiss the anchor, tell them why it’s too low, then ask them to try again. I may do this a couple of times before providing my counter.