ANCHORING THE NEGOTIATION

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Imagine you and a friend are looking out at an enormous crowd. You turn and ask if she thinks there might be more than 5,000 people and if so, how many. Your friend might say something like: “There’s definitely more than 5,000 people, I think there has to be 7,000.” Now imagine you’re looking at the exact same crowd, instead you ask your friend if she thinks there might be more than 50,000 people and if so, how many. Your friend might say something like: “50,000 is a lot of people, I think there might be 15,000 people but not 50,000.”

 

How is it that the phrasing of your question caused your friends estimate to double from 7,000 to 15,000? The answer is the anchoring effect, a cognitive bias that causes individuals to give an irrational amount of weight to the first number put forth in a discussion, failing to adequately deviate from that reference point when making future calculations and estimates.

 

WHERE YOU END UP HAS A LOT TO DO WITH WHERE YOU START

As you might expect, anchoring is an important tool in negotiations. An anchor acts like a tractor beam: once its locked on it defines the range of values under negotiated and sucks future offers towards it. For this reason, it is important that you, and not your opponent, set the anchor.

 

SELECTING YOUR ANCHOR

The first step in anchoring is to determine the ideal anchor to put forward. Your anchor amount must be both plausible enough to trigger the cognitive bias of your adversary, while leaving sufficient bargaining room for you to make concessions. As to the first point, an offer will not activate your counterparties anchoring bias if it does not track to reality. For this reason, outlandish offers should be avoided as they will merely disrupt the negotiation, fail to serve as an anchor, and provide your adversary with the opportunity to set the anchor themselves. As to the second requirement, that the anchor point allow room for concessions, the anchor must be distant enough that after repeated concessions you will still arrive at a settlement amount that gives you a disproportionate share of total settlement value.

 

A good starting point for an anchor that is neither to concessionary nor too demanding is an amount just outside your adversary’s settlement floor or ceiling. This lets your opponent know that you are negotiating in good faith, that you know where their settlement floor or ceiling is, and that you intend to leave the negotiation with more, not less, of the mutual benefit of settlement. For an article explaining how to calculate a settlement the floor, settlement ceiling, click here.

 

DROPPING ANCHOR

Now that you’ve selected an appropriate anchor you need to drop it. The key to effective anchoring is timing. This means that when possible you should try to make the initial offer.

 

What should you expect after you drop your anchor? Generally, you’ll receive a counteroffer from your adversary that substantially deviates from your initial offer. Don’t fret, this doesn't mean that your anchor failed. After all, it’s not until both parties have made concessions that you’ll be able to determine the band of values the negotiation is closing in on. Instead, think of your response to this counter offer as a second chance to reinforce your initial anchor.

 

REINFORCE YOUR ANCHOR WITH ANCILLARY CONCESSIONS

Imagine you’re a plaintiff and your anchoring offer was $100,000. The defendant responds with a $20,000 counteroffer. You can reinforce your initial anchor by not acknowledging the $20,000 counteroffer, but instead extending a non-dollar value concession to the counterparty. For instance, you might offer to split the $100,000 into a series of equal monthly payments or agree to extend the payment deadline on the lump sum. These non-dollar-value concessions serves two purposes: (i) they avoid recognizing the counteroffer you just received, preventing that amount from serving as an anchor that defines the zone of reasonable negotiated values, and (ii) it leave intact the $100,000 offer as the only amount under consideration by both parties, reinforcing its anchoring effect.

 

Unfortunately, reinforcing an anchor is more difficult for the defendant, who has less flexibility to offer concessions regarding payment terms. Generally, the plaintiff will be expecting a lump sum, payable soon after settlement. To give yourself flexibility to make non-dollar-value concession as the defendant, your initial offer could be to pay some amount, say $50,000 in 12 equal monthly installments. This way when the plaintiff comes back with a counteroffer of $100,000, you can offer to make the $50,000 payment immediately, reinforcing your anchor point.

 

In many instances a creative defendant will identify non-cash concession that go beyond merely modifying the timing of payments. Where a non-dollar value concession can be made, it should be made, as any meaningful non-cash concession will do the trick to reinforce your anchor. Remember, the point of exercise is to keep your anchor on the table for as long as possible. Only once you’ve exhausted meaningful non-dollar concessions should you respond with dollar-value concessions.

ANCHOR OR BALL AND CHAIN?

It’s important to know when you shouldn’t make the initial offer. Where the counterparty has informational advantage they will likely have a firmer grasp of the appropriate settlement floor, settlement ceiling, and ZOPA. In such instances, it may be best to avoid making the first offer, as doing so could define a negotiation range that sells you short. Where outgunned, you might be better off waiting to see where your opponent attempts to anchor the negotiations.

 

CUTTING LOOSE AN ANCHOR

If you're operating at an informational disadvantage and decide to forego making the initial offer, or you planned to make the initial offer but the other party beat you to the punch, you can still anchor the negotiation but it will require a two-step approach. First, you need to diffuse the anchoring effect of your adversary’s initial offer. To do so, firmly explain that you did not consider the offer because it fell well outside the range of reasonable values under negotiation. By responding in this way, you will diffuse the power of the initial offer because you have made clear that it did not initiate negotiation. Once clear that the initial offer was not considered, you can suggest that the negotiation begin in earnest with your anchoring offer. 

 

INFORMATION IMMUNIZES YOU FROM THE ANCHORING EFFECT

Unfortunately, your adversary may also understand the value and techniques of anchoring. For this reason, it is important that your negotiation preparation include exercises that immunize you from the pernicious anchoring effect. A good place to start is by estimating the settlement floor, settlement ceiling, and ZOPA, as well as determining your initial anchor amount and the anchor amount you believe the counterparty is likely to offer. Remember, information is the antidote to the anchoring effect. After all, if your friend knew how many people were actually in the crowd, they wouldn’t be swayed by the way you phrased your question.

 

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Citations

• Richard Luecke, Harvard Business Essentials: Negotiation [Harvard Business Press (2003) p. 49

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