Communications & Marketing
Using anchoring in negotiations
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My most popular behavioural finance workshop series have been on negotiations. The participants in these workshops were typically teams of private equity investors and venture capitalists, or corporate mergers and acquisitions teams.

These are smart people. They typically have plenty of high-stakes negotiations experience. That is what they do for a living.

Therefore, these sessions are not supposed to be Negotiations 101. Rather, the purpose is to help participants to apply insights from psychology to reach better negotiated outcomes.

How can they better influence their negotiating partners and better manage their own negotiating blind spots?

A few million dollars-worth of anchoring

The single most powerful and reliable psychological effect that I talk to participants about is anchoring. Psychological research shows that anchors can significantly impact people's decisions. Further, negotiations research confirms that anchors can impact negotiations in particular.

When the results of one of the negotiating exercises I run with workshop participants are posted on the whiteboard, they typically show the same effect. That is, the impact of anchoring is strong, even among these sophisticated and experienced negotiators. The purchase prices they agree for a hypothetical pharmaceuticals factory vary by millions of dollars, depending on who uses the first anchor in the negotiation.

Initial bids/offers as anchors

Some people are reticent about putting a number on the negotiating table that could serve as an anchor. They fear that their initial bid might be so high as to be accepted gleefully, or so low as to be rejected out of hand. These risks are real, so these participants' fears are genuine. It is dangerous to be the first to move if a person has little idea whether their bid or offer will be perceived as substantially too high or too low.

Example 1. Inadequate knowledge and making the first move

Buying a technology start-up can be used as an illustration. Is it worth zero, or perhaps a billion? It is easy to be wrong by an order of magnitude. Going first in this type of negotiation could be dangerous.

However, these risks should not stop people using anchors to their advantage in situations where they have a good understanding of the negotiating range.

A person is less likely to be wildly wrong when valuing a particular asset or service when they have expertise and recent experience valuing similar assets and services, or a number of directly comparable transactions as benchmarks, or their valuation is underpinned by readily marketable assets and services.

While there is always some uncertainty in a negotiation, and gauging the amount of that uncertainty can sometimes be difficult, workshop participants do have some of these types of information about the hypothetical pharmaceuticals factory. Nobody's valuations are radically too high or low. Something else is making them reluctant to go first.

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