People tend to irrationally fixate on the first number put forth at the bargaining table—the anchor—no matter how arbitrary it may be. Even when we know the anchor has limited relevance, we fail to sufficiently adjust our judgments away from it. This is an example of the anchoring effect in negotiations.
Understanding ZOPA (The Zone of Possible Agreement) at the Bargaining Table
It is desirable to anchor first in many negotiations, for several reasons. In many bargaining table scenarios, you are trying to both learn about the zone of possible agreement (ZOPA) and influence the other side’s perception of the ZOPA. While advance research can help you reduce your uncertainty about the ZOPA, you typically will have more to learn about the ZOPA once talks begin. As such, you will be vulnerable to being anchored. Therefore, anchoring first in price-oriented negotiations can be both good offense and good defense.
When presenting an overly aggressive offer, however, risks derailing negotiations if it causes the other side to question your credibility or to wonder whether a negotiated agreement is even possible. Because it is hard to know what your counterpart will view your offer as absurd, anchoring with a relatively inflexible, extreme offer increases the probability of reaching a stalemate. Anchoring instead with a flexible but extreme offer gives you a lower-risk opportunity to favorably shape your counterpart’s perceptions of the ZOPA.
The most effective anchors further reduce risk because, rather than placing firm offers on the bargaining table, they merely introduce relevant numbers. A job applicant may state his belief that people with his qualifications tend to be paid between $85,000 and $95,000 annually, or he might mention that a former colleague just received an offer of $92,000. This assertion is not an offer; it’s an anchor that affects the other side’s perceptions of the ZOPA.
Finally, you can also anchor by citing apparently comparable negotiated agreements as precedent.
Consider the case of a money manager preparing to negotiate her annual bonus. “While bonuses last year were 50% of salary,” she might tell her boss, “I recognize that this year will not be as good as last year.” Another approach is to mention proposals made by more extreme elements of one’s constituency. A prospective customer might tell a salesperson that, while he loves the product, his purchasing department is undoubtedly going to demand price cuts of 15% or more. Such statements can have an anchoring effect without requiring you to make an extreme offer that could jeopardize talks. As these integrative negotiation examples have shown, sometimes revealing one’s hand is the quickest route to value creation at the bargaining table.
What are your thoughts on the anchoring effect in negotiations? Share your thoughts with our readers in the comments below.
Adapted from “Anchoring Expectations,” by David A. Lax (principal, Lax Sebenius LLC) and James K. Sebenius (professor, Harvard Business School), first published in the Negotiation newsletter.
This article was originally published in 2011.