6/26/2023 0 Comments The anchoring heuristic![]() In one negotiation simulation, for example, online participants playing the role of a landlord renting out an apartment perceived “renters” who made precise rent offers (such as $2,117.53 per month) as less flexible than those who made round offers (such as $2,100 per month). In their research, Lee and her team found that very precise offers risk scaring away potential negotiators by conveying inflexibility. By contrast, in many real-world negotiations, “first offers are presented before the involved parties begin to negotiate.” Take the case of someone comparing the prices of homes or used cars on online listing sites. “Prior studies that have demonstrated a precision advantage have operated under the premise that the involved parties have already decided to negotiate,” write Columbia Business School researcher Alice J. ![]() ![]() Counterparts tend to cave in accordingly. Precise offers convey that you have a solid sense of the commodity’s value and are unlikely to be flexible on price. And, generally speaking, the more precise your offer is, the stronger an anchor it will be, researchers have found. The fewer zeros there are at the end of your price offer, the more precise the offer is said to be. When making an opening offer in a negotiation, our main focus is typically how high or low it should be: a $350,000 sale price for our house, or maybe $360,000? By contrast, the precision of that offer-that is, should the listing price be $350,000, $349,900, or maybe $349,999?-is often an afterthought. Download our FREE special report, Negotiation Skills: Negotiation Strategies and Negotiation Techniques to Help You Become a Better Negotiator, from the Program on Negotiation at Harvard Law School. The results of two studies suggest two new and somewhat surprising ways to do so.īuild powerful negotiation skills and become a better dealmaker and leader. The anchoring heuristic highlights the importance of crafting our first offers with care. Not surprisingly, then, that negotiation research consistently shows that the person who makes the first offer typically comes out ahead, price-wise. The first number serves as an “anchor” that’s almost impossible to forget. Why are first offers so influential in negotiation? In their groundbreaking research from the 1970s, psychologists Daniel Kahneman and Amos Tversky showed that when we’re asked to make a judgment in the face of uncertainty, we are easily swayed by the first figure that’s introduced into the conversation, however irrelevant, outrageous, or insulting it may seem. Similarly, make an unambitious or poorly worded first offer, and you’re much less likely to reach your goals. A weak handshake or a gruff demeanor can color how we see someone for a very long time. Giving new information thorough consideration to determine its impact on the original forecast or opinion might help mitigate the effects of anchoring and adjustment, but the characteristics of the decision-maker are as important as conscious consideration.It’s said that you never get a second chance to make a great first impression, and that certainly can be the case in negotiation. Unlike the conservatism bias, which has similar effects but is based on how investors relate new information to old information, anchoring occurs when an individual makes new decisions based on the old, anchor number. Anchoring can be used to advantage in sales and price negotiations where setting an initial anchor can influence subsequent negotiations in your favor.Īnchoring is a cognitive bias described by behavioral finance in which individuals fixate on a target number or value-usually, the first one they get, such as an expected price or economic forecast.Awareness of anchoring, monetary incentives, giving careful consideration to a range of possible ideas, expertise, experience, personality, and mood can all modify the effects of anchoring.Anchoring and adjustment have been shown to produce erroneous results when the initial anchor deviates from the true value.Anchoring and adjustment is a cognitive heuristic where a person starts off with an initial idea and adjusts their beliefs based on this starting point.
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