What is the anchoring effect during salary negotiations?

//What is the anchoring effect during salary negotiations?

According to Wikipedia:

Anchoring and adjustment is a psychological heuristic that influences the way people intuitively assess probabilities. According to this heuristic, people start with an implicitly suggested reference point (the “anchor”) and make adjustments to it to reach their estimate. A person begins with a first approximation (anchor) and then makes incremental adjustments based on additional information. These adjustments are usually insufficient, giving the initial anchor a great deal of influence over future assessments.

In situations of ambiguity & uncertainty, if the first party offers a strong anchoring effect, then they influence the conversations throughout the rest of the negotiation process. Let us demonstrate this with an example:

A classic example of anchoring is the price of a new car. It’s common knowledge that the price you actually pay for a car is less than the sticker price of the car. So, why do car dealerships even bother posting the sticker price? Let’s say you are willing to pay € 18,000 to €19,000 for some car. You visit a car dealership & see that the sticker price is € 20,000. After some negotiating, the sales person offers to sell it to you for € 19,000. Because of anchoring, you will be convinced you are getting a much better deal than if the car was initially priced at € 19,000. The initial price tends to act as a reference point for subsequent discussions around the price thereby shifting the discussion toward the higher end of your price range.

In a Quora discussion on salaries:

According to a Harvard article written by Adam D Galinsky, the author provides an example using Real Estate Agents. The real estate agents should resist the anchoring effect of a property’s list price because of their presumed skill at estimating property values. Testing this theory, researchers Greg Northcraft and Margaret Neale had real estate agents inspect a house and estimate its appraisal value and its purchase price. Northcraft and Neale manipulated the house’s list price, providing high and low anchors. All of the agents’ estimates were influenced by the list price, yet they denied factoring the list price into their decisions, instead citing features of the property that would justify their estimates.

According to Adam Galinsky, every item under negotiation, regardless of whether it’s a company or a job, has both positive and negative qualities:

  • High anchors selectively direct our attention toward an item’s positive attributes
  • Low anchors direct our attention to its flaws

In the salary negotiation context, the reason recruiters ask for your salary is to see how cheaply they can recruit you. Anyone running a business is motivated to keep their costs down. The anchoring effect significantly favours recruiters and employers because they have more information about their pay grade than you do and your salary expectations. Usually, most job candidates don’t negotiate; if the employers offered a package similar to the candidate’s previous salary with a minor uplift, most candidates would take it.

Anchoring comes into play in negotiations as well as purchase decisions: studies consistently find that making the first offer works in your favor. The deciding factor on whether to go first in a negotiation is how much information you have regarding the other side’s willingness to pay (WTP). If you believe that you have sufficient information about the other side’s willingness to pay, then go first to avoid being anchored. If you suspect that you have relatively minimal information about the other side’s willingness to pay, let the other side open the negotiations and collect more information. In many cases, based on your lack of information regarding the other side’s willingness to pay, the conventional wisdom is correct: don’t make the first offer. The risk, however, is that you may fall for the effects of anchoring.

Under such circumstances as with salary negotiations during job interviews, the best strategy is to deflect any direct queries regarding your salary expectations. Once you divulge your salary expectations, you have effectively conceded your bargaining power! Salary negotiations are all about confidence and information asymmetry. So, do your research and make sure you know what the current market rate is for the role you are applying for.

By |2018-09-25T11:34:16+00:00November 15th, 2017|Career|

About the Author:

Mithun Sridharan
I am Mithun Sridharan, Managing Partner & Co-founder of INTRVU, where I run the Career Services track. I'm also responsible for strategy and platforms at INTRVU. An Engineer by education and a Management Consultant by passion, I lead the Digital & Data Practise for Germany, Austria and Switzerland at Sapient Consulting, where advise clients in the Financial Services industry. I hold an MBA from the European School of Management & Technology (ESMT) Berlin and a Master of Science in Digital Communications from Christian Albrechts University of Kiel. I also run Think Insights, a blog on Management Consulting and serve as the Frankfurt Chapter Lead for The Linux Foundation since 2016. I enjoy reading business books & magazines (Economist, Wired, Harvard Business Review, McKinsey Quarterly, BCG Insights, etc.), listening to podcasts (TED Talks, David Ramsey Show, a16z, Tim Ferriss Show, etc.), playing golf and watching history documentaries. I am based in Heidelberg, Germany.
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