Anchoring and adjustment was first theorized by Tversky and Kahneman. The pair demonstrated that when asked to guess the percentage of African nations which are members of the UN, people who were first asked “was it more or less than 35 per cent” guessed lower values than those who had been asked if it was more or less than 65 per cent.
Subjects were biased by the number 45 or 65 and this had a meaningful influence on their judgment. Over time this bias has been shown in numerous experiments. Interestingly, paying participants based on their accuracy did not reduce the magnitude of the anchoring effect.
(1) Experts and non-experts are affected similarly by an anchor; (2) Anchoring-adjustment may occur in any task requiring a numerical response, provided an initial estimate is available; and (3) One study of particular importance for investors, by Joyce and Biddle (1981), found support for the presence of the anchoring effect among practicing auditors of major accounting firms.
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 whether to go first in a negotiation depending on how much information you have regarding the other side’s willingness to pay.
If you believe you have sufficient information about the other side’s willingness to pay, then go first to avoid being anchored. If you suspect that you have relatively minimal information about the other side’s willingness to pay, let the other side open the negotiations and collect more information.
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.
In many cases, based on your lack of information regarding the other side’s willingness to pay, the conventional wisdom is correct: don’t make the first offer. The risk, however, is that you may fall for the effects of anchoring. Here are five counter negotiation tactics that you can use to help protect yourself from the worst effects of a buyer’s anchor:
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.
Tactic 1: Ignore the anchor: When confronted with an aggressive opening position the best thing is to deflect it and not to respond directly by suggesting you either agree or disagree. Obviously, you have to acknowledge hearing their opening. Here’s an example of how you can respond: “… I think we may be looking at this contract renewal in very different ways. Let’s try and find some common ground by discussing…..” In this way, you shift away from this topic and allow you get back some control of the negotiation.
Tactic 2: Counter-anchor: Alternatively, you can counter offer quickly to offset the anchoring effect of the buyer’s first offer. For example: “Ten per cent discount? Actually, we just implemented a five percent price increase on all contract renewals based on our increased costs”
Tactic 3: Separate leverage from information: Every buyer’s opening includes attempts to use “leverage” and provides “information”. The buyer tells you what they want (information) and why you should accept it (leverage). In cases where the buyer takes an extreme position, it is easy to let the buyer’s attempt to use leverage distract you from the information they are providing. The key here is to carefully listen for what is information and what is leverage.
For example: “XYZ Corp has offered the same thing for 20 per cent less.” In this case, you should not dwell on the buyer’s implicit demand for a discount to match the competitor but rather focus on how to best differentiate your offering from the competition. If you are unsure test your understanding. For example, “Could you go over that again?” “I am not sure what it is you are asking for…” or “ What commitment have you made to XYZ Corp?”
Tactic 4: dissipate the anchor: if the buyer’s position is so extreme that it is far outside your planned positions. Here, you have to be prepared to say that this opening position is not even a basis to negotiate. In other words, you are telling the buyer that you reject their anchor. Naturally, you have to back this position up with one or two reasons and propose what would be an acceptable basis to negotiate (Counter-Anchor).
In any negotiation thorough preparation and research is essential to determining when to make the first offer. In order to avoid the effects of anchoring or use them to your advantage, you must first understand your buyer and his or her willingness to pay. If you let the buyer go first and make the first offer, it is essential that you manage the effects of anchoring.
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