What are anchors in negotiations

Humans are terrible at judging stuff objectively. We use comparison for virtually all judgements. Anchors in negotiation exploit this human trait. An anchor offer is when one party starts with an offer that is very high or very low. Usually but not always the anchor is beyond the stretch goal. The party putting the anchor on the table is not expecting the other party to agree to it. They make the offer so the other party will compare their counter and all subsequent offers to it.

Maximizing the impact of your anchor

Picking rational anchors that can’t be easily discarded by your other is an essential first step. Next pick a precise number to ask your other to consider. In the video below Prof Epley explains how precise anchors like $1, 226.43 have more psychological weight than a number like $1300. More psychological weight means that your other will be more influenced by the anchor.

Anchoring with the arbitrary

Anchoring takes advantage of the human need to compare. It does not require that the number used is related to the negotiation. In his article about Coherent Arbitrariness,  Ariely and colleagues conducted a number of different experiments to demonstrate that arbitrary numbers, like social insurance numbers, impact what a subject was willing to pay. The arbitrary could be a date 2021/05/25 written on a proposal or even a joke about making a million dollars an hour. In a negotiation even made up or irrelevant numbers can impact how your other views the real numbers.

Anchoring within an offer

Some deals hold low risk opportunities to use an anchor in one part of the deal on another part of the deal. We see examples of this type of anchoring in all sorts of commercial transactions. When buying a new car people see the MSRP and negotiate about the sticker price and trade in value, but when they are working on the options, extended warranties and the like, they are no longer cost sensitive. Some factory GPS systems cost $4000 dollars and map updates cost hundreds of dollars. Objectively, they are a bad deal. When they are anchored against the cost of the car, they seem reasonable.

Unions and Employers in collective bargaining will also be familiar with this sort of anchoring in collective bargaining negotiations. Larger gains and concessions are advanced on one issue like wages or pensions while the parties work on lower cost items like fringe benefits. That way the impact of the lower cost items is seen as less in comparison to the larger ask.

Anchoring with a non offer

When anchoring a negotiation you obviously want to pick a number that will benefit your case. There is a risk that if you pick a number that is too high or too low, your other may prematurely terminate the negotiation. Anchoring with a non-offer allows you to anchor without damaging your credibility. This method introduces a high boundary number into the mix, thereby hinting at your expectations without extending an offer.

In collective bargaining, a good time for this sort of anchor would be during the opening statement or at the start of monetary talks. The union may talk about the success of the employer and very high wages paid at competitors. Conversely, the employer may talk about their challenges and at what labour cost they would achieve competitive profitability. Notice that in the examples neither the employer or the union are making offers; they are providing specific numbers they have seen elsewhere as a starting point for a discussion.

Reverse anchors in negotiation with a non offer

A closely related anchoring technique is what I call a reverse anchor non offer. This is a high risk, but potentially high reward technique where you call our a predicted extreme position of your other and anchor it as unreasonable. This usually requires that you have some information about what your other is seeking. If an employer hears that union members are demanding a 20% increase in health spending and knows the union hasn’t committed publicly to 20%, they can use reverse anchoring with a non offer to defuse a potential union demand by saying something like: “We understand we need to make increases to health spending. We are ready to do that. It can’t be an unreasonable amount like 20%, but we are serious about addressing this issue.”

In this case, if the union had aspired to a 20% increase they would be planning on anchoring well above that. Once the employer deploys the reverse anchor, the union would need to reconsider how they would put the proposal forward. Keep in mind the employer didn’t say no to their proposal; they hadn’t made one. The employer essentially put them on notice that they would consider an amount like 20% unreasonable. Now the closer the union gets to 20%, the closer they are to the amount labeled unreasonable.

Timing of reverse anchoring is very important. Once the other negotiator has committed beyond their team to put certain offers forward, reverse anchoring can promote conflict and lead to impasse. Applied at the right time, it can motivate your other to negotiate with themselves prior to even coming to you.

Negotiation powermove: negotiate against yourself

Most negotiators will tell you to never negotiate against yourself – this is the exception that proves the rule. Anchoring is powerful. It can be paired with the reciprocation prior to a counteroffer to disarm your other using what Cialdini called the rejection-then-retreat technique. In this technique you make a very large ask and then when rejected you immediately make a smaller ask. The smaller ask should be closer to your target. Your other will be anchored to your large ask and may feel some need to reciprocate since you made such a big concession.

Responding to anchors in negotiation

Deciding how best to respond to an anchor can be a difficult decision. There are basically two methods: ignore it or deal with it. Both methods require that you identify an initial offer as an attempt at anchoring.

Ignoring an anchor requires your homework to have been done and requires that your bargaining range respects market conditions. This is almost certainly what many interest based negotiation courses will tell you to do when faced with an absurd offer. The risk here is that while your interests may be satisfied, the amount of excess value you keep may be minimal. It is very important that you explain your offer and not be persuaded by arguments about how far from their initial offer they have come. You need to discuss the rationality of your offer not the distance from their irrational anchor.

Dealing with an anchor in negotiations means adjusting your counter. It is the preferred method if their anchor is not absurd. In negotiations, we use the midpoint rule as a way to figure out where the parties will land. Generally the midpoint between the first two serious offers will be approximately where the parties settle. So the higher they anchor, the lower you do. When responding to an anchor, it is useful to explain where your number came from. Helping your other see your point of view may help you get what you want. Remember if all you do is shout numbers at each other your are bartering not negotiating.

This convergence on the midpoint is based on reciprocity. Each side makes similar sized reciprocal concessions until they get to the midpoint. Make sure you evaluate any potential counter offer against your bargaining range and your resistance point to ensure you are not letting your other’s anchor get the best of you.

Risks of anchors in negotiation: wrong number

If you haven’ done your research, you may pick an anchor that is within the ZOPA. The best case here is that your other will accept your rational offer. The worst case is that they will assume you expected negotiation and offer you a lower price trying to maximize their claimed value.

Risks of anchors in negotiation: ending the negotiation

Bad deals should not get done and some people use the first offer to determine if there is a ZOPA or if it is just a bad deal. Picking an anchor that is out of bounds risks the other party walking away. You need to take care to pick anchors in negotiation that generates a productive response. This can be done by ensuring your anchor offer is in an acceptable range or by anchoring without an offer.

Wakely Mediation can help

Whether you need help with negotiation strategy or you need a neutral to help you and another party reach agreement, contact Wakely Mediation to discuss how we can help you work through your negotiation.