Why You Should Make the First Offer in A Negotiation
How would you answer the following questions:
1. Is the average length of adult blue whales longer than 113 meters? What is your estimation of the average length of adult blue whales?
2. Was Leonardo da Vinci born after 1952? Which year do you think he was born?
Take a moment to decide, write your answers down if necessary and don’t read on until you took a guess. What is your estimation for the first question? The correct answer is twenty five meters. How close is your estimation to the actual value? Did you guess an average length of 50 meters or longer?
Let’s look at the second question: You probably know that Leonardo da Vinci was definitely not born after 1952. But what year did you guess instead? The correct answer is 1452. How close to this year is your estimation? Did you guess a year after 1700?
Of course, it is tough to estimate the exact average length or the year of birth, but the purpose of this questions was not to test your knowledge about marine mammals or Italian Renaissance art creators. The questions are examples from the studies of Strack and Mussweiler, published in the Journal of Personality and Social Psychology in 1997. Strack and Mussweiler studied the anchoring effect, a phenomenon that is the reason why your estimations might have been more inaccurate than you would like to admit.
What is the anchoring effect?
As the name suggests, the effect is about setting an anchor. This anchor is usually the first piece of information provided to a person. It serves as a starting point based on which one will subconsciously adjust his judgment. You may have wondered why the first question asked if the average length of adult blue whales is longer than 113 meters because it seems quite evident that the answer is no. This question only served as an anchor (113) to influence your judgment during the next question and make you guess a higher average length.
In the next question, the anchor was the year 1952. It is pretty clear that Leonardo da Vinci was not born after 1952. However, this question might have influenced you to estimate a later year of birth for him than you would have done without the anchor.
Have you ever wondered why some restaurants put a “suggested tip” at the bottom of your bill? There are usually several options displayed, ranging from 18% to 22% percent gratitude of the final price. They serve as an anchor for the customer’s mind, which can lead to him paying more than he usually would because his mind will start with the suggested tip and adjust downwards from there on.
During my time in Shanghai, I got talked into visiting a local fake market. A vendor there tried to sell me a belt by claiming that the same model would cost 900 Yuan at any other vendor on the market. However, he said he would give me a special discount and sell it for 300 Yuan only. This is an excellent example of how the anchoring effect can be used in a sales situation: By dropping an inflated initial price, a vendor can anchor the customer, which increases the likelihood of him making a higher initial offer. By the way, shortly after I saw a copy of the mentioned belt in a regular store. Price: 70 Yuan.
How to use it
There are several ways to make use of the anchoring bias. A very common one is its application during negotiations: You might have heard or read before that whoever makes the first offer has an advantage. The reason for this is the anchoring bias: The side which makes the first offer dictates the direction in which the final price will go – a high starting price almost always results in a higher final price.
When making your offer you better not name an absurdly high amount that might provoke the other party. That being said, you shouldn’t be afraid to make an aggressively high offer. A problem of many negotiators is their hesitance of naming a high first price, which leaves them in a weak position: There is little room to make concessions to the other side and the price might still get bargained down. A high starting price, on the other hand, provides plenty of room for concessions and the final price will likely be higher as well.
Another risk of aiming to low when making the first offer is that you ask for less than the other side is willing to pay. This could happen for example when you are negotiating the price for your service or product, and you are too anxious to ask for a high price, leading to you making an offer that is way below what the other party would have paid. Therefore, know your worth and don’t be afraid to charge accordingly.
The anchoring effect cannot only be used in negotiations or to make your customers pay a higher price. Wansink, Kent, and Hoch examined how anchoring can make customers buy more units of a product. In their field study, they advertised a soup product in a store and placed a sign next to the display, which said: “Limit of 12 per person”. Shoppers who bought the soup from a display without this sign bought on average 3,3 cans of soup. At the display with the mentioned sign, customers bought on average seven cans. The sign served as an anchor and successfully manipulated customers to buy more units of the product.
How to avoid it
Like many biases, anchoring serves as a shortcut for the brain, to make judgments more easily. What makes this effect so omnipresent is the fact that an anchor doesn’t need to have anything to do with the judgment, decision or estimation you are about to make. In an experiment conducted by Dan Ariely with his MBA students from MIT Sloan School of Management, he had them write down the last two digits of their social security number. Then, he held an auction for items like chocolate and bottles of wine and let the students place their bids. The half of the class which had the higher numbers was bidding 60 to 120 percent more than the other half. The anchor, the social security number, had no connection with the auction, yet still, it made people bid more (or less) on the items.
Avoiding the anchoring bias entirely is difficult, if not impossible. To not get influenced by this effect you must force yourself to not pay too much attention to the first piece of information you get. In praxis, this is hard to pull off as the anchor will influence you from the moment on you perceived it. Being aware that your judgment is getting anchored does not eliminate the effect.
However, I think you can protect yourself to some extent against it by forcing yourself to think in absolute numbers rather than relative ones. If a salesperson tries to anchor you by mentioning the tremendous price to which he sold the same offer to another customer, remind yourself that it’s probably nonsense; most likely he made that up to have an effective anchor which will increase your spending willingness. Think of how much the offer is worth to you and don’t get fooled if the salesman offers you a discount on the exaggerated initial price.
If you are about to enter a negotiation, you should set in your mind a price limit that you don’t want to exceed (or undercut if you are the seller). Recall this number when the other side makes its offer in an effort to anchor you. Another tip to avoid anchors is preparation: The effect works best in situations of uncertainty. Whoever has more information usually has the upper hand in a negotiation, while the one with a lack of information is even more easily anchored. Therefore, be prepared and try to be the one who makes the first offer. After all, it’s hard to avoid the anchoring effect fully, but you sure can use it by yourself.
