The anchoring effect is a cognitive bias that describes the common human tendency to rely too heavily on the first piece of information offered (the “anchor”) when making decisions. During decision making, anchoring occurs when individuals use an initial piece of information to make subsequent judgments. Once an anchor is set, other judgments are made by adjusting away from that anchor, and there is a bias toward interpreting other information around the anchor. For example, the initial price offered for a used car sets the standard for the rest of the negotiations, so that prices lower than the initial price seem more reasonable even if they are still higher than what the car is really worth.
In negotiations, the anchoring effect occurs often, but goal setting can affect the end result. In a review of goal-setting research, negotiation scholars Deborah Zetik and Alice Stuhlmacher of DePaul University found that when negotiators set specific, challenging goals, they consistently outperform those who set lower or vague goals. Perhaps not surprisingly, performance improves when negotiators are given rewards for reaching a goal, such as a $10,000 bonus for billing 2,000 hours. Even an unrewarded goal, however, such as running five miles today, boosts performance.
Yet there are several potential drawbacks to setting ambitious negotiation goals. Most obviously, failure to reach your goal can affect your satisfaction with the overall outcome. Although researchers Adam Galinsky, Victoria Medvec, and Thomas Mussweiler found in one study that negotiators who focused on high goals achieved objectively better outcomes than did peers who did not focus on high goals, the high-achieving negotiators were less satisfied with their outcomes than were their peers.
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Notably, when these high-achieving participants were asked to consider their reservation prices (walk-away points) and then evaluate their outcomes, their satisfaction corresponded to objective measures of performance. The lesson? To maximize your outcome, focus on your ambitious goal during the negotiation. After the negotiation, enhance your satisfaction (or your boss’s) by comparing your outcome with your reservation price.
When you commit to your goal by limiting your future flexibility (such as publicly announcing your commitment to a low purchase price in advance), you may find yourself choosing between impasse and an unattractive alternative. Aggressive commitment strategies are most effective when used with those likely to make large concessions under pressure and when developing a reputation for toughness is important.
When Ed Rendell became mayor of Philadelphia in 1992, city workers were among the most highly compensated municipal employees in the country, and the city had an annual budget deficit of $250 million. Rendell knew the employees’ unions could make concessions but that convincing them to do so would be difficult. As reported in the New York Times, before negotiations even started, Rendell publicly repeated—almost daily—his pledge to balance the city’s budget and endure a strike if necessary. These statements enabled him to commit to his challenging goal. Rendell offered union workers a contract that, among other things, froze their wages for 33 months. The workers went on strike, but accepted the offer just 16 hours later. Over the next four years, the contract saved the city an estimated $374 million.
A final concern is that goal setting may boost motivation for undesirable behaviors such as cheating. Scholars Maurice Schweitzer, Lisa Ordonez, and Bambi Douma demonstrate that when people fail to reach their goals, they are more likely to engage in unethical behavior such as deception in order to claim they reached their targets. When you give your sales team challenging goals, you could be motivating them to book illegitimate sales as well as legitimate ones.
What are your thoughts on the anchoring effect? Leave us a comment.
Related Negotiation Skills Article: Definition of Negotiation: The Art of Persuasion? Apple and Effective Framing
An Example of the Anchoring Effect – What to Share in Negotiation
Claim your FREE copy: Negotiation Skills
Build powerful negotiation skills and become a better dealmaker and leader. Download our FREE special report, Negotiation Skills: Negotiation Strategies and Negotiation Techniques to Help You Become a Better Negotiator, from the Program on Negotiation at Harvard Law School.
Adapted from “Aim High, Improve Negotiation Results,” by Maurice E. Schweitzer (professor, University of Pennsylvania), first published in the Negotiation newsletter.
Originally published June 2010.
I find that anchors are only effective if they are credible, otherwise, they can be very damaging to trust and bargaining relationships.
As a mediator I often see the original demand as a pipe dream that has virtually no anchoring effect. All the parties know this and yet almost never start with realistic and achievable goals.
I work with applying behavioral economics to B2B sales organizations. Anchoring can be very subtle and the really good sales rep can drop an anchor very subtly. For example “Is your budget more or less than $100,000” seems like a simple question, but it definitely sets the anchor. “I’ve known companies who have paid $50,000 for much less than that” also seems innocuous, but, it too sets the anchor.
Knowing how to set the anchor is one of the best practices of the best salespeople. It doesn’t come easily but with training it can become a learned skill.
This was thought provoking and helpful. Sometimes, however, tough talk and ‘red lines’ can limit progress -ref Teresa May in the U.K Brexit negotiations started using a lot of ‘fightin talk’ that caused her problems ultimately
I very much liked the article. Definately provided great feedback on a tool to use prior to the negotiating procedures.
My own experience is that reservation prices are artificial, concepts that don’t translate out of the theoretical arena.
Setting a reservation price is more akin to bidding in a bridge game than simply deciding on your own lowest price.
We all look around to see what other people think is valuable, and act accordingly.