181 – Anchoring a negotiation

Posted on October 14, 2012 by

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It’s a twisting lane winding its way between by squat buildings huddled together. People mill back and forth creating confusion. Small shops, following one another, spill trashy products onto the narrow passage. The air is stale, and so is the sun; dust thickens into stench. A man notices your surreptitious glance at his colorful wares and makes an inviting gesture as he mentions an outrageous price. You are in a souk: you may not know it yet, but you’ve begun a negotiation.

There are many possible reasons for the opening price gambit. The rational expectation economist might mutter that the shop-keeper is seeking information about market prices in this way. The behavioral economist (another species altogether) has an alternative explanation: the man has just anchored the negotiation. Once an offer is made – once a number, actually any number, has been heard – unconsciously people use this available figure as reference point.

Of course you’ll view the price as outlandish. You’ll use it, however, as anchor to make a counter-offer, proposing say half the price. In doing so you’ve already yielded the frame of negotiation to the shopkeeper (the carpet is only worth 20% of the price that was being asked at the outset). Once the initial price is set, a path-dependent process of offer and counter-offer ensues, yielding a roughly predictable result. The first price has anchored the negotiation, and the rest follows. You may walk away with the object feeling that getting the carpet for “half-price” was a bargain.

A bargain compared to what: the original asking price, or the market price? As tourist one really does not have a clue about market prices, so one blindly accepts the offered price as guideline for the bargaining. Hating aporia our subconscious brain grasps the first number, any available number, and takes it as a guide. Experiments have been made asking people first to recite the last digits of their Social Security number, then to make wild guesses. Sure enough, people with higher number gave higher estimates.

We are far away from a proper explanation of this intriguing phenomenon, but it would seem that our reflexive (Type 1) brain blindly makes the association, trusting the reflective (Type 2) brain to correct the mistake if conditions allow and warrant it[1].

When diplomats first meet to negotiate, one is sometimes confronted with a long laundry list of demands from the other side. The opposite number across the table is not expecting to have all its demands met – after all, it is a negotiation, not a diktat. The purpose of the list is to anchor the negotiation.

Yielding on only half the outlandish requests might look to us as great negotiating achievement – little do we unwary negotiators suspect that while resisting outlandish demands we has given ground on all points the other side truly cared about. Such is the power of anchoring a negotiation.

Anchoring a negotiation is a good opening gambit – but whether or not to use it has to be judged in context. Political strength favors outlandish initial requests. At the end of the day one may get more than expected, and a reputation for flexibility and reasonableness in the bargain. The politically weaker side may want to make modest demands, but stick to them while claiming the moral high ground (my position is fair, hence I need not move) and implying that further bargaining is really yielding to a bully. The opening gambit thus implicitly yields a lot about each side’s assessment of power relations.

Obfuscation may be a counter-move (in the souk you avert your eyes and move on). It is a way of avoiding commitment to an initial position. For once the bargaining process has begun – often the initial position is a matter of pure chance- the process has an inner and inescapable logic. Counteroffers must remain within the frame. The cost of going back to the beginning, both in time and emotions invested, grows rapidly in exponential terms – culturally we hate going back on commitments. Rare is the diplomat who is able to break out of the negotiating bound and make an offer so novel and clever that the other side is forced to follow (see my 29 http://bit.ly/W8dRUv better to understand MUSASHI’s wisdom in this light).

Public diplomacy follows similar rules: “saying it loud and early” anchors the public argument. The other side will spend much time refuting the initial claim – implicitly and backhandedly giving it credence. “No smoke without fire” – most will mutter. Inaugurating the topic of the public narrative thus is half controlling it. The narrative space, once claimed, rarely admits a competing storyline, though it might provide room for corrections, refinements, and what else.

Fifty years ago a wizened and bibulous ambassador may have offered such pearls of wisdom wrapped in a self-aggrandizing anecdote. I remember listening to such negotiating wisdom and despairing of how to put it to good use. Behavioral economics is providing a frame that allows us to recognize as well as master a situation. Better understanding, however, does not necessarily imply a better outcome.

The centipede’s enemy asked, with an impish smile: “How do you move your feet without stumbling?” In the end Type 1 brain always wins over Type 2, for rationalizing just takes up too many resources. A strategy of “information dominance” as currently pursued by the hegemon, is short term. It’s enormously costly for one. On the way to dominance it may be easily countered. And integrated – interoperable – systems, once breached, are easily destroyed or made ineffective.


[1]            See e.g. Daniel KAHNEMAN (2011): Thinking, fast and slow. Farrar, Straus and Giroux, New York.

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