The anchoring heuristic7/29/2023 ![]() ![]() Given past research showing that even irrelevant or arbitrary numbers can serve as powerful anchors in negotiation, University of Pennsylvania researcher Nazli Bhatia and Johns Hopkins University professor Brian C. It’s not an actual offer but may carry the weight of one. Here’s an example from a car seller: “I was going to ask $8,000 for the car, but I can let you have it for $6,500.” In this example, $8,000 is a phantom anchor. ![]() Another is whether to frame it in terms of a so-called phantom anchor-a figure that is not actually being offered. Precision is just one factor to consider when crafting your first offer using the anchoring heuristic. However, once the negotiation is in progress, you might increase the precision of your counteroffers to convey that you don’t have a lot of wiggle room on price. A round first offer is likely to entice more bidders. In short, the results suggest that past advice advocating precise offers needs to be modified. Similarly, gathering data from the real estate service Redfin, the researchers found that the more precise the listing price on a property was, the more likely the seller was to have relisted the property at a lower price due to lack of interest from prospective buyers. The landlords tended to prefer to negotiate with those who made round offers. 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. 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. ![]()
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