Anchor

An anchor is the first offer made by each side during a negotiation, wether it is a specific price, payment terms or a bundle of equipment or services. Basically, it anchors the negotiation around a specific point.

Effect of anchors

The anchors are numerical values which tends to pull judgments toward themselves. We call this the anchoring effect. The effect is particularly strong when occurring in a situation of great ambiguity and uncertainty.

There are three studies that demonstrate the influence anchors on human judgment, whether it was exercised on experts or regular individuals:

1. Researchers Greg Northcraft and Margaret Neale had two groups of real estate agents estimate a property value. They provided the agents with a high list price in one case and in the other case a low list price. It turns out these experts were influenced by this data.
2. Thomas Mussweiler, professor of social psychology at the university of Cologne, had customers approach German mechanics and ask them for an estimate of their car’s value. Half the mechanics were given a low anchor and the other half a high anchor. Again, these experts estimated the car to be worth substantially more when they were given the high-anchor value.
3. In 1974, psychologists Amos Tversky and Daniel Kahneman span a roulette wheel, landing randomly on a number. Then, they asked participants to estimate the percentage of African countries belonging to the United Nations. When a 10 appeared on the roulette wheel, participants gave a median answer of 25 countries. When a 65 appeared, participants gave a median answer of 45 countries.

These studies emphasize the effect anchors have on us, however irrelevant the data might be.

How to use anchors

Should you make the first offer

Common wisdom for negotiations often advises to wait for the other side to make the first move, the first offer. Nevertheless, as the studies seen above prove it, making the first offer will anchor the negotiation in your favor. There is one major exception to that rule: when your opponent have much more information than you do.

Negotiators shouldn’t be afraid to be aggressive on their first offer and should place anchor relatively high. In the perspective of a seller, the more extreme the first offer is, the higher the final settlements are, even when making concessions. Moreover, by making an aggressive first offer you give your opponent the opportunity to extract concessions from your, providing him with great satisfaction. On the opposite, a nonaggressive first offer will leave you two choice, make small concessions or stand by your demands.

How to construct your first offer

First of all, when offering a price, it is important to keep in mind your target price and floor price (or reservation price). It will enable you to walk away of any deal below your floor price and lead your negotiation toward your target price (or above). Then, try to identify the reservation price of your opponent and his alternatives to your offer. This way, you will be able to offer a price beyond but also to assess boundaries you should not cross to avoid driving your opponent away.

How to protect your offer

Sometimes, your opponent strikes back with a counter offer and propose splitting the difference between your market-based price and his emotion-based price. This is why you should always base your offer on tangible data and information so that your can argue and stand by your demand. Then, ask your opponent to justify his offer and explain why his price is correct. Chances are he won’t be ably to justify his counter offer.

See also

(en) Harvard Business School Working Knowledge - When to Make the First Offer in Negotiations