Anchoring Effect

WRITTEN September 6, 2018 Author: John Epstein

We were at the Great Wall of China. A gentleman in my tour group showed interest in a folding fan that a vendor near the Wall was selling. He wanted to bring home a souvenir.

The vendor’s asking price was 125 Yuan (about $18) for the folding fan. After a few minutes of back-and-forth haggling, the gentleman bought the fan for 30 Yuan (a little over $4). We congratulated him on his negotiating expertise!

The next day I was in a store in Beijing and saw the exact same fan being sold for 10 Yuan (around $1.50). And we all thought 30 Yuan was a great deal!

This was an example of the anchoring effect, which influences us to rely too heavily on the first piece of information we receive.

The first number that we saw for the fan – 125 Yuan – became the reference point from which the negotiation started. The vendor ultimately reduced her asking price 75%, but it was still three times more than a retail shop. Lack of knowledge about value exaggerated the anchoring effect and caused the buyer to significantly overpay. Fortunately, this was a low stakes negotiation. In business, the stakes are usually much, much higher.

What should we do when someone makes an unrealistic offer with the hope of anchoring our expectations?

  1. Recognize the anchor for what it is; an attempt to skew our thinking in a way that is unfavorable to us.
  2. Let the other party know that their offer is well outside the range of what is acceptable.
  3. Quickly make a counter offer and explain why your offer is fair.

We should quickly defuse the anchor or risk having it fall into the bargaining zone. That is, if we start talking about the anchor it will, consciously or not, become part of the negotiation.

Do your homework and you can mitigate the anchoring effect.

 


This information is discussed in our Negotiating Skills ► Into Action curriculum. If you’re looking for ways to improve your communication skills, register for one of our public classes.

 

Other Resources:

 

What is the anchoring effect?

(Video) Critical Thinking: Cognitive Biases: Anchoring

The Neuroscience of Sales: The Anchoring Effect

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