Anchoring or focalism is a cognitive bias that describes the common human tendency to rely too heavily on the first piece of information offered (the “anchor”) when making decisions. During decision making, anchoring occurs when individuals use an initial piece of information to make subsequent judgments. Once an anchor is set, other judgments are made by adjusting away from that anchor, and there is a bias toward interpreting other information around the anchor. For example, the initial price offered for a used car sets the standard for the rest of the negotiations, so that prices lower than the initial price seem more reasonable even if they are still higher than what the car is really worth.
The following items are tagged anchors.
The power of anchors in negotiation has been demonstrated time and again. Sellers who demand more tend to get more. Indeed, the initial asking price is usually the best predictor of the final agreement.
A trio of researchers may have found an important exception to this rule, however; lower starting numbers set by the seller in an auction can lead to higher ultimate prices. Professors Gillian Ku of the London Business School and Adam D. Galinsky and J. Keith Murnighan of Northwestern’s Kellogg School of Management found this result both in laboratory experiments and from data taken from online eBay auctions.
In past issues of Negotiation, we’ve reviewed the anchoring effect – the tendency for negotiators to be overly influenced by the other side’s opening bid, however arbitrary. When your opponent makes an inappropriate bid on your house, you’re nonetheless likely to begin searching for data that confirms the anchor’s viability. This testing is likely to affect your judgment – to the other party’s advantage.
Psychologists Amos Tversky and Daniel Kahneman identified the anchoring effect in 1974. Participants watched a roulette wheel that, unknown to them, was rigged to stop at either 10 or 65, the estimated the number of African countries belonging to the United Nations. For half of the participants, the roulette wheel stopped on 10. They gave a median estimate of 25 countries. For the other half, the wheel stopped on 65. Their median estimate was 45 countries. The random anchors dramatically affected judgment.
Should you make the first offer? Few questions related to negotiation have yielded more attention and debate. The conventional wisdom among some: Don’t make the first offer, or risk “showing your cards” and perhaps unknowingly giving away some of the bargaining zone.