When you are about to negotiate, is it better to go first, or is it better to wait for the other person to show their hand and you then are able to adjust with more information?
Well, according to the research, whoever provides the first piece of information has a major advantage, as the final agreed number tends to be closer to their initial suggestion.
This is due to a cognitive bias called anchoring.
Anchoring is a process by which people are influenced by a piece of information given to them just before they are asked to make a judgement.
It refers to our tendency to rely too heavily on the first piece of information we receive when making a decision, even if that information is irrelevant or of little value. This is because once the anchor is placed in our brains, all subsequent information is compared against it, whether or not the anchor was realistic or fair to start with. This can cause us to make judgments that are not rational or accurate.
For example, take a sales negotiation for a used car. You want to pay as little as possible (say $1000). The sales rep wants to make as much as possible, so says the car is worth $10,000 first. Now, all subsequent negotiations compare the price to be paid against $10,000, and the price you end up paying is likely to be much more than the $1000 you wanted originally.
One of the most famous experiments that demonstrated the anchoring bias was conducted by Amos Tversky and Daniel Kahneman in 1974. In their experiment, participants were asked to estimate the percentage of African countries that were members of the United Nations. However, before they were asked to provide their estimate, they were asked to spin a wheel of fortune that was rigged to land on a number between 0 and 100. The participants were then asked to provide their estimate, and the researchers found that the estimates were strongly influenced by the number that was generated by the wheel of fortune. Specifically, participants who spun a lower number provided lower estimates, while those who spun a higher number provided higher estimates.
Since this landmark study, there have been numerous studies that have confirmed the anchoring bias. For example, a study by Mussweiler and Strack in 1999 found that when participants were asked to estimate the value of a house, they were strongly influenced by the asking price provided by the real estate agent, even when they knew that the asking price was not necessarily a reflection of the true value of the house.
In another study by Northcraft and Neale in 1987, participants were asked to negotiate the price of a car. The researchers found that when the initial asking price was higher, the final price that was agreed upon was also higher.
In fact, studies have shown that even giving someone a completely random number, such as one based on a person’s Social Security number, can strongly influence the value someone gives to something.
Other examples of how anchoring happens in the real world including any time you see a product being discounted on sale. Companies will often say “Was $249, now only $199, save $50”. Well, that would only be true if the price was ever really $249. Research has shown than many retailers, especially before sale events like Black Friday, will artificially raise product prices, or just quote higher normal prices, and during the sale time show the previous price but claim that it is now cheaper.
Anchoring can also significantly impact companies and their ability to innovate and change. When asked to make a decision, the major anchor which will be present is the status quo. Everyone already has the information of how things currently work (status quo) in their minds, so as the first piece of information it acts as an anchor against which new information (innovations) must be compared. If the company has previously been successful, that likely means that the status quo, based on what worked historically to help them succeed, must have worked, and the brain is most likely comfortable therefore thinking that it will continue to work into the future.
As a result, new and innovative ideas can seem more risky when compared against the status quo, resulting in many ideas being rejected.
It is also a reason why so many estimates for innovation projects (and in fact plans for all projects) can be so wrong. If people know there is an expectation for a certain result for a project, such as a revenue target, market share or valuation based on competitors in the market, often this acts as an anchor and will subconsciously guide the estimates given by the team. If these estimates are inaccurate due to being too close to an overly-ambitious anchor, it can result in the project appearing as a failure, when the result may have been considered a success if the initial estimates were lower to be compared against.
So, what can we do to overcome the anchoring bias? One strategy is to be aware of the bias and consciously try to adjust our estimates or judgment, and especially where information is coming from which is being used to make a decision.
Another strategy is to seek out additional information to help us make a more informed decision. In some cases, it may be helpful to rely on outside experts or objective criteria to help us make a decision. After all, in a negotiation, the person you are negotiating against will likely only be interested in what benefits them the most, which might not including providing you accurate information.
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thank you for the information