Dealmaking and the Anchoring Effect in Negotiations

The anchoring effect in negotiations: what to know about when to show your interests at the bargaining table

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anchoring effect

The following question regarding the anchoring effect was asked of Program on Negotiation faculty member and Harvard Business School and Harvard Law School professor Guhan Subramanian:

Question: I’m in a tough negotiation right now where the other side has made a very aggressive first offer. I know that I need to defuse his anchor, but I’m not sure how.

What should I say and do?

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The Anchoring Effect at the Bargaining Table

Answer: A well-known cognitive bias in negotiation, anchoring is the tendency to give too much weight to the first number put on the table and then inadequately adjust from that starting point.

When your counterpart has dropped an anchor, the first and perhaps most important step is to recognize the move, since you can’t defend against something that you don’t see coming.

Fortunately, you’ve already identified your counterpart’s maneuver as an attempt to anchor the negotiation in his favor.

Next, you need to defuse the anchor clearly and forcefully: “I’m not trying to play games with you, but we are miles apart on price.”

A common mistake is to respond with a counter offer before defusing the other side’s anchor.

If someone opens with $100, and you want to counter with $50, before presenting your number, you need to make clear that $100 is simply unacceptable. If you don’t defuse the anchor first, you are suggesting that $100 is in the bargaining zone.

After defusing the anchor, move quickly to your counterproposal, with the caveat that “protesting too much” might actually validate the anchor.

In a negotiation simulation I observed recently, one student spent a considerable amount of time explaining why $10.69 per hour would be an impossible wage rate.

The final deal price: $10.69 per hour.

Making a Counter Offer After Anchoring in Negotiations

In making your counter offer, be sure to explain your proposal; don’t just throw a number over the fence.

It’s particularly important to explain why your counteroffer is fair. Also, be aware of the “midpoint rule”: the best predictor of the final deal price is the midpoint of the first semi-reasonable offer and counteroffer.

The extent to which you can achieve or even surpass the midpoint rule will depend on how effectively you have defused the anchor. Here’s one example. Recently, a small business owner was negotiating with a general contractor over the price for a public/private development project.

They agreed on the scope of the project and the various details.

Then the GC put together a price tag that was at the very high end of the zone of possible agreement, or ZOPA: $1,150,000. In an e-mail responding to various points in the proposal, the business owner quickly defused the anchor: “Probably most importantly, the number just isn’t feasible.”

Then came the counteroffer, reinforced with a reference to a third-party constraint: “Not only do we not have this kind of money but the government is paying 20%, and they have estimated the project should cost no more than $950,000. Can you let me know how we can get to that number?”

The GC came down a little bit but not enough and offered to make compromises on the scope of the project to get to the desired number.

The business owner then referenced his walk-away alternative: instead of scaling back, he explained, “I’d rather just put off the project.” After a few more days of back-and-forth, the parties agreed on a price of $1,040,000—almost halfway between the opening offers from both sides. Effectively defusing an aggressive anchoring effect (without dwelling on it), justifying the counteroffer, and “looking forward and reasoning back” in light of the midpoint rule led to a reasonable outcome.

How has the anchoring effect changed one of your past negotiations?

Related Article: Dealmaking5 Tips for Closing the Deal – Here are five bargaining tips for negotiating a contract or agreement with your counterpart.

Claim your FREE copy: Dealmaking

Discover how to boost your power at the bargaining table in this FREE special report, Dealmaking: Secrets of Successful Dealmaking in Business Negotiations, from Harvard Law School.

Adapted from “Anchors Away,” first published in the October 2011 issue of Negotiation.

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