Negotiations: Avoiding anchoring bias to get the best deal

Let me start with a real story- Our part-time maid is paid Rs 2,000/month and this Diwali, my wife planned to give her some bonus. She calculated it to be Rs 1,000 based on her past experiences with maids. However, 2 week before Diwali, our maid told my wife that the neighbors gave her Rs 8,000 and a Sari as the bonus. Now, my wife was puzzled. She thought it was outrageous but she also wanted to fulfill the maid’s expectations. Finally, she decided to give her Rs 3,000 as a bonus, and felt happy when the maid didn’t complain.

We experience anchoring all the time

What happened in the above story is “anchor bias” which we face regularly in our daily life without even noticing it. We see examples every day. A project that has a deadline after few months gets completed in the last week (or sometimes last day) only. Can you be offered compensation for your new job without the HR asking you about your previous compensation? In all these examples, someone is setting an anchor for us directly or indirectly.

Human mind works around an anchor

So, the question is why do people need anchor or develop biases around an anchor? The answer probably lies in the way human mind works. Calculating “real value” is complex, and it’s generally a range rather than a number in all these examples- value for the maid, value of a new employee, effort required to do a project. However, it’s easier for human minds to work around a benchmark or an anchor. Amos Tversky, Daniel Kahneman, Richard H. Thaler and Cass R Sunstein have conducted experiments and researches around cognitive biases that have helped marketing organizations, stock traders and individuals to generate benefits.

Our own Experiment

I’ll talk about an experiment we did with a sample set of highly qualified and educated Individuals. This included Sunstone PGPM students, friends and professionals. We created two groups of ~20 each, and asked them two questions. For the first group, we asked if Sahara desert area is more or less than 1 million sq km and then we asked them to estimate the size of desert. For the second group, we asked the same questions but changed 1 million to 20 million sq km. Actual area of Sahara desert is 9.4 million sq km but most of the people didn’t know the exact numbers. The results were drastically different once we introduced an anchor. Average for first group (with 1 million anchor) was ~0.9 million and second group (with 20 million anchor) was ~8.5 million!

We can use anchoring to maximize our gains Anchor first, anchor early.

Airline customer service use anchoring to reduce your dissatisfaction when a flight is cancelled. For example- if your morning 7 AM flight is cancelled and there is space in 9AM flight, they will call you to say that they are booking you on 11AM flight but they will also try for 9AM flight, if it is possible. Very quickly, they set the anchor on 11AM flight and when they actually book you on 9AM, you feel better. One more example is of real estate brokers in Delhi region. Most of your friends will tell you that a 15-day rent is a norm for brokerage and nobody even questions this anchor. I would suggest that when you are looking for a new property next time, try dropping your anchor, if supply is not a constraint- you might be surprised (I have seen this go as low as 10% of the “norm”).

CEOs do it all the time

The trick is to understand that reacting to an anchor is an easier task and setting one is complex, and thus more valuable. Good negotiators and leaders master in setting up the anchor and setting it early. Great leaders and CEOs set anchors for their team (sales numbers, deadlines, company goals etc.) rather than only reacting to it. They are obviously open to modify it if it is required. Anchors have immense powers and even the most rational humans can be convinced around an irrational anchor.

There was a reason Neil Armstrong landed on the moon only in 1969. It’s because JFK said in 1962 that we will put a man on the moon this decade.