The art of negotiating: How to use anchoring to your advantage

By Bob Sullivanindependent investigative journalist and ongoing contributor for CNBC, NBCNews.com, and Credit.com

Bargaining is one of life's great survival skills. At work, it can get you a raise, or more vacation time. At home, it can get you a weekend with the girls (or guys) without the usual strife. Critically, as a consumer, bargaining can make a bad deal a good deal -- or vice versa -- in the blink of an eye.

Sadly, many of us go through life dreading negotiations; we're bad at it, and end up overpaying. Today, we're going to try to fix that.

Plenty goes into the art of bargaining. Entire volumes are written about negotiation tactics. These can be intimidating, particularly when you are dealing with something emotional. And let's face it, everything's emotional -- buying a car, selling a home, talking through that New Orleans weekend trip with the guys. So, we're going to stick to something simple. In fact, you've probably been the victim of this tactic most of your life. After today, you are going to use it to your advantage instead, or at least become intimately aware of this trick.

It's called "anchoring."

It's simple. The first number thrown out during any bargaining session "frames" the discussion. It drags the ultimate "price" in its direction, like gravity drags objects towards Earth. Want to buy a couch on Craigslist for $200 but think it's worth $300? Offer $100 right away. Even if the seller is outraged, that $100 offer serves to anchor the discussion, dragging the entire framework of the negotiation down toward the price you want to pay.

Perhaps you've heard that it's a bad strategy to be the first one to throw out a number during a negotiation. For example, if you are standing on a corner trying to buy tickets to the game from a scalper, you don't offer an amount, you ask, "How much do you want?" Or if you are talking salary while applying for a job, you want to wait until the firm tells you its range before you make a salary demand. I'm not going to say that's wrong. I'm saying research has shown human nature includes the anchoring effect; and it's hard to fight human nature.

Research into anchoring dates back to the 1970s and Nobel Prize-winning economist Daniel Kahneman. In one of his more famous experiments, Kahneman and fellow researcher Amos Tversky asked subjects to quickly guess at the solution for one of two math problems — 8x7x6x5x4x3x2x1 or 1x2x3x4x5x6x7x8.

The problems are obviously the same, but participants who saw the bigger numbers first guessed a much larger sum than those given the calculation on the right. How much more? FOUR TIMES more.

The descending list elicited an average guess of 2,250.

The ascending list: 512.

That's how much impact presentation has on people's perception of numbers.

In a little-noticed additional finding from this famous study, Kahneman showed how bad people are at math. The correct answer is 40,320. (That troublesome reality, sometimes called "innumeracy," will be the subject for a future column.)

This anchoring effect (also called "adjustment") has been duplicated in lots of experiments. Dan Ariely, who wrote the best seller Predictably Irrational, asked test subjects to write down the last two digits of their Social Security number, then asked if they would pay that amount in dollars for an item of unclear value, like a bottle of wine. At a later auction, those with higher Social Security numbers submit bids that are up to 120 percent higher.

Loyola professor Joseph Ganem wanted to see if these theoretical, and admittedly unrealistic, examples would hold true in real-life, big money situations. After all, when real money is involved, people's reactions could theoretically change. But, they don't. Writing in his book, The Two-Headed Quarter: How to See Through Deceptive Numbers, he explains a detailed experiment he ran on real estate agents.

They were asked to guess a realistic sales price for a home based on a 10-page packet of information where the only variance was the list price. When it was $119,000, the average guess was $114,000. When the list price was $149,000, the average guess was $128,700. Changing a few digits on a piece of paper influenced these "professionals" and their opinions by more than $14,000.

Much to their embarrassment, the agents had no idea that list price was impacting their estimates.

“Only 10 percent of the agents mentioned listing price as one of their top three considerations,” Ganem writes. “It is interesting that anchoring effects influence experts without their being aware of, or at the very least, willing to admit the influence.”

Anchoring is indeed real. So, what can you do about it? Let me caution you against your first impulse, which is to think that you are too smart to fall for it, particularly now that you know the fancy behavioral economics name for it. Studies show that even when anchors are so extreme as to be ridiculous, anchors still have an impact. One test asked participants how old Gandhi was when he died, first framing the question as “before or after age 9,” or “before or after age 140.” Those anchors worked, with the first group guessing, on average, 50, and the second grouping guessing, on average, 67.

No, you can’t avoid anchoring. But you can use it. The simplest way is the example above. Throw out a lowball or highball number first: (“I’ll buy that couch for $50!” – “But it’s worth $300!” – “Ok, well, $150 then!”)

Naturally, you can’t always do that. Car dealers have no-one-ever-pays-full-price-plus “second stickers” on them for a reason. Say a car costs $27,000-- $3,000 over MSRP because of local market conditions. Second sticker means folks are more likely to pay MSRP. You can try throwing out a second anchor then, such as $18,000, and see what happens. Because dealers rarely let you negotiate directly with the other side – you have to go through a powerless sales floor associate – it’s hard to work this tactic.

But in plenty of other negotiations, you’ll find anchoring works for you. Buying concert tickets on the street. Buying second-hand gadgets online. And even dealing with your spouse. (“It’s just a four-day weekend, hon...ok, ok, we’ll only go for three days.”)

At a bare minimum, be aware that plenty of other folks will try to drag your bank account down with an anchor. Understand this reality, and you’ll take a mile-long leap towards becoming a better bargainer. (OK, maybe it’s just a few steps in the right direction. But, see what I did there?)

Written on November 3, 2016

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