Specific Anchors Are Sometimes Good When Negotiating

There are several mechanisms at work when using anchors during negotiation.

Posted Jan 17, 2017

Public domain via Pixabay
Source: Public domain via Pixabay

One of the biggest cognitive influences on any negotiation is the anchor.  Whenever you are negotiating about something like a salary, there is some starting number that gets things going.  That initial number often has a significant impact on the rest of the negotiation. If the initial anchor is high, the final settlement is often higher than if the initial anchor is low.

The work of Kahneman and Tversky demonstrated that people take an anchor and then adjust from it. So, if you are buying a house, the home seller sets a price that serves as an anchor. The buyer then adjusts downward and often makes an offer that is lower than the seller’s asking price. The anchor matters, though, because people often do not adjust enough.

Ever since the initial research laying out the idea of anchoring and adjustment, research has explored factors that influence the way people adjust. A paper in the December, 2016 issue of Psychological Science by David Loschelder, Malte Friese, Michael Schaerer, and Adam Galinsky builds on work exploring the impact of the specificity of the anchor.

Suppose, for example, that you want to buy a house. You know that a house in the neighborhood where you are looking is going to cost about $500,000. There are lots of ways that the seller could set the initial price. They could use a very general anchor (like $500,000), a very specific one (like $523,451.32) or something in between (like $522,000). 

What is the impact of having a specific anchor?

There are two effects a specific anchor can have. First, the anchor may influence what you think is negotiable. A very general anchor like $500,000 suggests that the seller wants to get something in that ballpark, but giving a lower counter offer like $425,000 does not seem out of the ballpark. However, when a more specific anchor is used, then it suggests that the rest of the digits in the anchor also have meaning.  So, if the seller asks for $522,000, then the seller seems committed all the way down to the thousands column of the number. So, perhaps a counteroffer of $505,000 (or perhaps $495,000) seems like a large step down.

Of course, the very specific anchor seems strange. If someone goes down to the cent when creating an asking price for a home, that feels a bit weird. Perhaps the seller does not really understand what it means to create a home selling price.

This discussion suggests that two different elements may be at play. First, the smallest digits used in the anchor may send information about what the person creating the anchor is committed to. Second, the person seeing the anchor may use that anchor to assess whether they think the person creating the anchor knows what they are doing.

To test these two mechanisms, the authors did several studies in a variety of domains (like home buying and purchasing gems). The anchors were either very general, somewhat specific, or highly specific (as in the examples I gave).  Participants were selected either to have very little knowledge in the domain or a lot of knowledge. So, in a home-buying scenario, participants were either realtors (who are experts in home-purchasing), or people who have very little experience with home purchases.

The people who did not have much expertise were affected by every kind of anchor. The more specific the anchor, the closer to the asking price was the counteroffer and the more that the person was willing to pay overall. That is, novices were affected only by the anchor.

The experts, though gave a counteroffer closer to the anchor for moderately specific anchors than for general ones. However, when the anchor was very specific, the experts gave counteroffers that were far from the anchor. Follow-up questions suggest that they assumed that the person giving a very specific anchor did not know what they were doing. 

A final set of studies had a condition in which a person gave a very specific anchor, but then gave a good reason for using this specific anchor. In this case, the scenario involved buying a used car. In one condition, sellers gave reasons for the anchor they picked that demonstrated a lot of expertise (like adjusting for after-market modifications and driving habits of the previous owner). In the other condition, the sellers did not give a reason for the anchor they selected. When the seller could demonstrate expertise with their reasons, then specific anchors also affected the judgments of expert participants (who were car salespeople and mechanics in this study). Even expert participants did not adjust far from specific anchors in this case.

This finding extends previous work on the role of anchoring and adjustment in negotiation. Specific anchors help a bit, because they provide information to other negotiators about what kinds of adjustments are likely to be accepted. However, negotiation partners are also looking for information about the competence of their negotiation partners. If you give a wildly specific anchor, you may send a message to others that you do not really know what you are doing.

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References

Loschelder, D.D., Friese, M., Schaerer, M., & Galinsky, A.D. (2016). The too-much-precision effect: When and why precise anchors backfire with experts. Psychological Science, 27(12), 1573-1587.