Don’t be weighed down by an anchor

Behavioural science has long been an interest to me, so I recently read a recommended book “nudge” by Thaler & Sunsten. It is a good read but a section on anchoring reminded me of the vulnerabilities of students upon hearing fantastical tales of anchoring.

Let me explain.

Anchoring has been proved, through many experiments over the years, to work. It focuses the mind, and you are, often subconsciously, drawn by it. For example, if we don’t know how much a Rolls Royce costs but we do know our Honda costs £30k, we would think that the Rolls must be worth at least three times that, so we estimate its worth by tripling the £30k to £90k. We are anchored by the number we DO know. It is somewhat irrelevant, but yet we are anchored by it. So we would perhaps offer £90k, not because its true worth is that, but because that is what we have estimated based on our perceptions of worth against a figure we do know to be true.

The same effect can work in a negotiation. If we are introduced to a number early on, we can be drawn to it, and consciously or subconsciously affect by it.

The negotiation archives are full of the stories of success from ‘expert’ negotiators who asked for hugely inflated sums and succeeded in the end to obtain a great deal – often the other party being delighted to have paid only half that first figure!

So why doesn’t everyone do it? Why not start out by aiming high and anchoring a huge figure in their minds?

There are 3 big problems with this approach. Firstly you need to be lucky. If the other party has a modicum of knowledge in the area your inflated figure will be wasted on them. Secondly, even if they believe your first figure, it may be so high that they can’t ever imagine getting close to it, so opt out of the deal altogether. Thirdly, if you do manage to keep them interested, in order to get to a settlement that the other party can pay, there could be HUGE movement necessary from you, weakening your position.

If you are dealing with amateurs you might get lucky enough to get away with it. But that’s not great advice, what if they learn and realize what has happened, they will likely not be happy to deal with your again. So even if it works, the resulting souring of the relationship could yet undo all your efforts.

If you are dealing with anyone that knows about negotiation, it will not only not work for you, it could end up working against you – as your position weakens, they could take advantage.

The moral of this story? Don’t be dazzled by the idea of big gains from poor anchoring decisions. Set your entry positions wisely, not wildly.