Anchoring effect and how it can sink your negotiations

Image by Emile Guillemot

This article was originally posted on Forbes.com and Ellevate Network.

One of the frequently asked questions when it comes to negotiations is who should make the first move? And more often than not, you come across an amateur answer of: “You want to be the one making the first offer.” The statement doesn’t equip you with the reasons as to why it’s critical, and also leads you to believe that if you aren’t the one making the first move, then you are in the losing seat, which isn’t accurate.

The reason why people tend to say “Make the first offer” is because of the anchoring effect that occurs at the time the offer is given. “Anchor” is a bias to rely too heavily on the first piece of information that is offered, and all humans have that bias. Negotiation is a dialogue during which new and critical data can be exchanged in an effort to identify priorities, hard limits, and optimize value propositions.

In negotiations there are two pieces of knowledge that flow between the parties: information and leverage.

It’s critical to understand when you are being given information vs when the other party is using their leverage. Information is what they want. Leverage is the reason why you should accept the offer.

Consider the following interaction when you are trying to negotiate a job offer: “We were budgeting $50,000 for this position. If you want to work for a world-recognized leader in retail, and be a part of award-winning team, we have to come to an agreement on the pay.” The first sentence is nothing more than just information, they are disclosing the budget for the position, yet it can serve as an effective anchor for you if you were planning on asking for $70,000. The second sentence is leverage, and a strongly emotional one at that. Or how about the following statement: “We have three other qualified candidates that fit within this budget.” In this case, the first part of the sentence is leverage, introducing competition, the second part is information and anchor – they have not one but three. Once you hear how many other candidates they have, you might be swayed to relax your goal.

Word of caution: extreme anchor values appear to create larger anchoring effects. If you are relying on certain numbers that were disclosed to you as a point of reference, you have effectively been anchored by the other party.

Word of wisdom: knowledge is the best antidote to anchoring! For example, if you know that your house is valued at $500,000, and you receive an offer for $350,000, you will immediately know it’s a low-ball offer without even entertaining the idea of further discussion.

It doesn’t matter who makes the first offer as long as you are aware of the anchoring effect and how to off-set it.

Below are 4 steps you can take to free yourself from the constant fear and uncertainty of who should go first as well as be sure that regardless of who makes the offer, you still hold a lot of cards in your hands to negotiate a good deal.  

Image by Matthew Waring

01. Beware of the bias!

The very first step towards any improvement when it comes to human biases is recognizing their sheer existence. Know that when you aren’t well informed on the subject, and somebody provides information to you as a point of reference, our quickly adaptable brains rely heavily on the data that is available right away. Approach all negotiations with caution and reflect on the information that is being provided, carefully treading through any point of references and seeing them for what they are – effective anchors.   

02. Know your numbers!

Do the research and prepare for negotiations, so you know what is acceptable and what is out of bounds. That will allow you to realize when anchor is being used to lowball or diminish your worth and value that you bring to the company. If you know that your skills, experience, and potential are worth $70,000 on the market, then when an offer that is substantially below that target is made, you will see it for what it is – an anchor. If you are looking for power in negotiations, know that knowledge is the greatest power a human can possess.

03. Make a commitment, not a decision!

If you don’t know your numbers and are in a situation where you realize you are being anchored, pause! Make a commitment to resume the conversation later, allowing yourself time to do the research and understand the true value of whatever discussion is focused around, rather than relying on information provided by the other party.

04. Reject the anchor!

The best thing you can do with an anchor is reject it. Whenever somebody mentions a number, mentally acknowledge that it’s an anchor and make a conscious effort to dismiss it. An effective counter to the offer that is well beyond reasonable is: “It doesn’t sound like we are on the same page, let’s start over to ensure that we are taking into account all the aspects that are in play.” You can’t just say ‘no’ but you can certainly say ‘this position is a no-go as a basis of negotiations’ You will have to mention a couple (no more) of reasons why and propose to start over with a realistic and acceptable basis.

Master the art of spotting anchors in your interactions. Deploy the steps above in your next negotiation, and you will come out ahead in value creation!