What is the Anchoring Effect?
The anchoring effect 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.
The anchoring effect is considered a “bias” because it distorts our judgment, especially when the bargaining zone is unclear. This knowledge of the anchoring bias in negotiation can help us make and respond to first offers more effectively.
Especially in negotiations around price, the party who makes the first offer often gets the lion’s share of the value. That can be due to the anchoring effect, or the tendency for the first offer to “anchor” the bargaining that follows in its direction, even if the offer recipient thinks the offer is out of line.
However, the anchoring effect can be more or less helpful, depending upon how it is used. For example, negotiation researchers have found that precise numerical first offers are more effective than rounder offers. For example, a house with a list price of $255,500 is likely to attract higher bids than houses with list prices of $256,000 or $255,000.
Another potential pitfall is presenting an overly aggressive offer, which risks derailing negotiations if it causes the other side to question your credibility or to wonder whether a negotiated agreement is even possible.
What if the other side makes the first offer? You can counter the anchoring effect simply by recognizing the move. However, don’t make the common mistake of responding 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.
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