On Anchoring Effects in Negotiations

This week’s book learning is from ‘Thinking, Fast and Slow’ by Daniel Kahneman.

Two groups of real estate agents were asked to value a house based on a booklet with a detailed description of the property. Half of them received a booklet which mentioned a substantially high asking price while the other half with a substantially lower asking price.

The anchoring effect observed (or roughly the difference in valuations) was a whopping 41%! And when asked as to the factors that influenced their decisions, the real estate agents vehemently denied the effect of the price on the booklet. In fact, they took pride in their ability to ignore it.

The same experiment conducted with MBA students showed a 48% anchoring index. The MBA students, however, conceded that the price on the booklet influenced their price. So, the professionals were almost as susceptible to anchoring effects as lay men!

How much would this home cost? $200,000? :)
Image by Pauline Eccles

These results show that the initial anchor has a powerful sub conscious effect on negotiations! So, what do you do when you receive an outrageous offer? Psychologists advise that the best thing to do is to make a scene and storm out, and only return if you can start all over again (i.e. with a new anchor)!

If walking out is not an option, then focus on reaching the minimum offer that could be accepted or the cost of failing to reach an agreement to the other party.

Here’s to ensuring we avoid anchoring effects in negotiations this week!