Idea in short

According to Wikipedia, anchoring:

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.

The phenomenon

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 its sticker price. 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, the discussions shift towards the higher end of your price range.

Public opinion

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

Salary negotiation

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. Going first in a negotiation depends on your information about the other party’s willingness to pay (WTP). If you have this information, then go first to avoid being anchored.

If you have minimal information about the other side’s willingness to pay, let the other side open the negotiations. Collect more information. In many cases, 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 scenarios as during salary negotiations, the best strategy is to deflect direct queries regarding your salary expectations. Once you divulge your salary expectations, you have relatively low bargaining power!