Consider Anchoring and How It Affects Your First Offer Strategy
Welcome to the third lesson of the course. The key message in this lesson: you should consider the impact of anchoring when developing your first offer strategy.
As noted by Bazerman and Neale and other researchers, humans tend to anchor on an initial value when estimating the value of uncertain objects. For example, try this experiment derived from an exercise by Russo and Schoemaker. Add 400 to the last three digits of your phone number and write down the total.
Now consider this: Attila the Hun was one of the most feared conquerors in world history. He was eventually defeated during the Common Era (that is, A.D.). Was he defeated before or after the number that you wrote down? After writing down “before” or “after,” write down the year in which you think that Attila the Hun was defeated.
When I run this experiment in class, the results are often similar to the following:
|Last three digits of
Phone number + 400
|Typical dates of defeat
of Attila the Hun
If you are a scientist looking at these results, what might you conclude? It appears that the numbers selected for the date of defeat on the right are influenced by the numbers on the left. That is, as the numbers on the left increase, so do the numbers on the right.
What is the relationship between the phone numbers and Attila the Hun? There is no relationship. Because my students are uncertain about the date of defeat, they anchor on the only number available—the last three digits of their phone numbers plus 400. (Incidentally, Attila the Hun was defeated in 451 A.D.)
First offer strategy
How does anchoring affect negotiation? An important question that arises during negotiations is: Who should make the first offer? I’ve asked business executives around the world this question and the result is usually the same: Always let the other side make the first offer.
How does the conventional wisdom—always let the other side propose the first number—relate to anchoring theory? Anchoring would suggest that you should propose the first number so that you can anchor the other side to your number.
Which side is correct? Here is a recommended rule of thumb. Follow the conventional wisdom when the value of the item sold is uncertain. By asking the other side to propose the first number, you gather information about the item’s value. (Of course, in so doing try to avoid being trapped by the other side’s anchor.) On the other hand, if you are quite certain about the value of the item, you should ignore the conventional wisdom and try to anchor the other side to your number.
In the next lesson, we look at the impact of overconfidence on your negotiation and other decisions.
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