The Power of Understanding

Increasing Negotiation and Leadership Performance through the Power of Understanding

Laws of Power 37: Anchor the Potential

By Karen S. Walch

Negotiators who rely solely on classic hardball tactics of negotiation will use the “lowball/highball” opening offer device to firmly anchor their position and weaken their counterpart in a negotiation. An extreme and aggressive initial offer is valid because this causes the other party to reevaluate their own resolve and opening offer and move them beyond their own resistance point or bottom line. This hardball tactic is very effective and enduring because most counterparts tend to be unaware and unprepared to defend themselves against this classic tactic. This week’s aw will address the concept of anchoring as an integrative negotiation practice that can be used by negotiators who have experienced the ineffectiveness of “lowball/highball” plans or prefer not to use hardball tactics.

This week is a continuation of a focus on integrative negotiation strategy and how this can be used to change the game of negotiation from a battle to a problem-solving experience. Anchoring is a critical negotiation skill, in general, and core competency for claiming as much as you can from the ZOPA while utilizing integrative negotiation techniques.

Proper planning for an integrative negotiation strategy helps negotiators to assess the general range of value for the topic under discussion. Preparation also provides the framework necessary to recognize hardball extreme initial offers and when to refuse to negotiate and insist that the hardball negotiator start with a reasonable opening offer.

A negotiator who has supporting evidence of the market value has a clear alternative to the agreement, and can respond effectively to an extreme counteroffer does not need to yield to or respond with yet another extreme unreasonable counteroffer.

This basic systematic preparation can assist a negotiator’s plan to use integrative negotiation techniques. In addition, an exploration about the psychological and social underpinnings about loss aversion can better prepare negotiators.

It is critical to the practice of integrative strategy to understand negotiators’ tendency to respond more favorably to loss avoidance rather than to acquisition of gains. This means that preparation is required about HOW to present or frame the anchors in order to engage the other party in problem solving versus battling within the ZOPA.

It is not enough to know how to set and adjust to anchors which set the ZOPA range based on a systematic estimate of the other party’s reservation price or initial offer. Most of the time, this information is uncertain and limited.

Therefore, it is important to frame the anchors in a way that will increase the impulse toward cooperation versus competition by your counterpart.

Recent social psychology research reveals a lot about loss aversion and how strong the impulse is for decision makers to avoid losses versus the drive to acquire gains. When a negotiator can frame the initial offer (or anchor) in a way that helps the counterpart mitigate some loss to them, they are more likely to cooperate in the negotiation.

When an anchor is set in a way that helps the counterpart to perceive ways they can avoid losses, this is a more powerful influence than positioning the anchor as a gain for your counterpart.

An MBA student, Francisco, recently applied this concept in his current negotiations. In the past, as a seller of mechanical services and equipment, he would often stall and wait to hear what a counterpart’s initial anchor would be.

Francisco would then lower or raise his own opening offer anchor as a result. Later, he often found out that the anchor suggested by the other party was often inaccurate or incomplete.

He realized that once the anchors were set by the parties (whether they, in fact, are realistic or not) they were treated as the valid benchmark from which all other counter-proposals and agreements were made.

Through his studies, Francisco became very interested in the research about loss aversion perceptions. As a result, he became more assertive in setting the first anchor point himself rather than wait to react to a counterparts’ initial offer.

He became increasingly aware of how many anchor points in negotiations are set carelessly and inaccurately. This became evident to him not only by reflecting on his own negotiation experience, but also from reading negotiation research, in general.

In the past, Francisco was able to utilize his talent for integrative negotiation strategies by encouraging his counterparts to expand their notion of the ZOPA’s “fixed pie.” However, in addition, now he is able to establish a more realistic and satisfying ZOPA range for himself in the negotiation.

Francisco is an example of an increasing number of negotiators who utilize integrative bargaining techniques to encourage the parties to exchange information, attempt to influence others to problem solve rather than embattle with others over the settlement point.

Francisco, like many other negotiations are more mindful that the same change in price framed differently has a significant effect on negotiation behavior. It is not the reality of loss that matters but the perception. Would you like to avoid a $500 surcharge or receive a $500 discount?

Law 37 Exercises:

1. Frame a potential concession from your counterpart in a way that makes the concession more attractive for them. Even though a $1 concession hurts each side equally, you can frame the potential concession to be a relative loss to you and not to them.

2. The better prepared you are, the less vulnerable you are to inaccurate anchoring by your counterpart. You are most vulnerable when you do not have alternatives to the negotiation and when you do not recognize when a counterpart is using low/highball tactics.

3. Reframe an understanding of the anchor points to break stalemates. Negotiators often become deadlocked because each side debates whether the anchors are fair. A discussion about why the parties believe the anchors are unfair can encourage the sharing of valuable information and misperceptions about the other.

Extra credit

For more on the research about loss aversion and negotiation, read Risk Aversion in Experiments, Volume 12 (Research in Experimental Economics) by Glenn W. Harrison and James C. Cox (JAI Press, 2008).

48 Laws for 21st Century Global Negotiators: Join Thunderbird Professor Karen S. Walch, Ph.D., as she explores the laws of power for 21st century global negotiators. Each Monday she discusses one law and provides an exercise to identify and enhance individual negotiation power. Go to the main menu for the series.