Falling for the Anchoring Effect? How to Avoid This Negotiation Trap
Anchoring in Negotiations
A simple example is purchasing a home. The seller asks $450,000. For a 4 bedroom, 5000 square foot home this may be a reasonable list price, but in the case of a one bedroom 1000 square foot house located in the country, this price point is absurd. You know it's too high, so you make a counteroffer. But the initial asking price is the anchor: it influences your offer. In the end, if you buy, you're likely to pay closer to the seller's starting point than your own - regardless of what the home is actually worth.
- Consider the relevant factors. In our house example, we'd want to compare the asking price to relevant factors. Good neighborhood? Ok. Needs a new roof? Take off $10,000. Make the process of adjustment
- List the cons. Studies show that when you generate reasons why the anchor is inappropriate, its effect is significantly mitigated. So, why is $450,000 absurd? List all of the arguments you can think of to reduce the impact of anchoring.
- Figure out what's important before starting to generate solutions. This way, you are more likely to get what you really need from the negotiation. Is it really important that you have four bedrooms? Do you need all of them? Should you pay for four when you only need three?
- Establish new anchors. Find another home for sale in the area with comparable square footage, the same approximate age, and other similar features. Determine price points, which can become your new anchors. More information can help combat the anchoring effect. Even better - do your research ahead of time and figure out what you believe is reasonable given various relevant and objective factors such as the above.
- Take the old anchors off the table. Focus on the lowest possible price, and don't let the heavy $450,000 anchor weigh down your decision. What is the cost to the seller if no agreement is met? What do they lose? Concentrating on this helps "debias" the anchor.
- Be prepared to walk away. This is the single most important thing to remember. If the other party can't take the anchor off the table, mobilize yourself: you may need to walk away from the negotiations. The best way to prepare for this is to have your BATNA worked out in advance. Remember, you can reset the anchors and reestablish talks.
We'd all like to think we're immune to anchoring, but it is a tremendously strong influence. Being aware that you can (and likely will be!) biased is step one. Next, develop a strategy incorporating these steps so you can overcome anchoring and reach the best possible solution.