A Guide to Anchoring Effect in Psychology and Negotiation

Anchoring Bias in Psychology and Negotiation

How to Use Anchoring Bias – And Counter the Other Party’s Use of It – in Negotiations

You have heard the sayings.

“First impressions are the most lasting.”

“You never get a second chance to make a first impression.”

And more variations. 

These same principles apply to negotiating settlements of auto accident cases, workers compensation claims, sales with vendors, and business deals: The first offer sets the value.

Psychologists call this the anchoring effect. 

And dropping an anchor when you make the first offer in a negotiation can help you get a better deal or resolution of your lawsuit.

Read on to learn how to use anchoring in your next negotiation – and what to do when the other side uses it against you. Anchoring is a simple but powerful strategy. 

And if you need help negotiating a top-dollar personal injury, insurance claim, or workers compensation settlement, call us at (804) 251-1620 or (757) 810-5614. We get results for accident victims in Virginia and Maryland.

What is the Anchoring Effect in Negotiation?

The anchoring effect describes a cognitive bias that causes us to rely too much on the first piece of information (or settlement number) we get when negotiating or making decisions. A cognitive bias is a deviation from rationality in decision-making. 

The first number is the anchor. And the anchoring bias influences our later negotiation responses if we make decisions using the anchor as a reference point instead of objective information.

Anchoring Effect Examples in the Real World

Companies and people use the anchoring bias to influence decisions everywhere. You can’t escape it.

Here are four examples of the use of anchoring in negotiation.

Example #1: Retail

Many retailers, including giants like Amazon and Walmart, put two prices on many products.

The first price is the original, non-discounted one.

The second price is the discounted offer.

Sellers use the first price to anchor your belief in how much the product is worth and the second price to make you think you are getting a good deal with the reduced rate.

Example No. 2: Job Interview

Imagine you want a new job, so you go online to look for job postings.

A potential employer may be willing to pay an applicant $60,000.

But the job posting may give a salary range of $40,000 to $50,000.

Seeing this range may cause you to ask for less money than you think you should get.

Example No. 3: Courtroom

The judge in a criminal case determines the prison sentence if the jury convicts the defendant.

The prosecutor will ask for one prison sentence at the sentencing hearing, while the criminal defense attorney will ask for another.

For example, the prosecutor may ask the judge to send the defendant to jail for ten years, while the defense attorney asks for three years.

At least one study found that judges given a higher anchor gave longer prison sentences than those presented with lower anchors.

Example No. 4: Mediation

Many civil actions end with a settlement, not by trial.

Mediation is one method used to negotiate a settlement.

And anchoring is often used during the mediation to reach a deal.

Suppose you suffered a torn rotator cuff, concussion, and back injury in a truck crash.

You may be willing to accept $750,000 to settle the case.

But you may drop an anchor of $2,000,000 to get more.

Anchoring is widespread in mediations involving workers compensation and auto accident cases.

Example No. 5: Buying a Car

Car dealerships may place a cheaper car next to a more expensive luxury vehicle.

The more expensive car is an anchor to influence your decision to buy the cheaper car.

Does Anchoring Work?

Yes.

Anchoring works in negotiations and sales.

Although the tactic is simple, using the anchoring effect often helps you get a better deal when negotiating.

Study after study over the past 60 years, many by behavioral economists, have shown that anchors affect people in negotiations.

Indeed, the anchoring bias still affected decision-making in studies that used wrong anchors, told participants about the bias, or incentivized them to avoid it.

Further, even professionals who negotiate for a living, such as real estate agents, insurance claims adjusters, and attorneys, are susceptible to the anchoring bias.

Why Does Anchoring Work?

The anchoring effect is easy to show but hard to explain.

Researchers have offered several theories to show why anchoring works, but there has yet to be a consensus.

Potential theories on why the anchoring bias exists include:

• The anchor-and-adjust hypothesis: This theory says that when we are unsure of an item’s value or how to decide its worth, we start by giving that item an initial value and adjusting. Humans are often reactive instead of proactive when dealing with the unfamiliar. So we look for external triggers, such as an anchor, to decide value. This results in problems when the anchor is wrong or we make insufficient adjustments during the negotiation.

• The selective accessibility theory stems from another theory, “confirmatory hypothesis testing.” It says the anchoring effect exists because the anchor primes us to remember, notice, and look for information that supports the anchor. Even if we decide the anchor is unsuitable, we still compare new answers or settlement offers to the anchor, looking for similarities.

• Attitude change: This explanation for why the anchoring bias exists says an anchor changes a person’s attitude toward the anchor to be more favorable of that figure.

How to Use the Anchoring Bias to Get More in Negotiations for a Personal Injury Case: Be the First to Promote the Settlement Terms

Here are some tips for using the anchoring bias to get more when negotiating the settlement of a tort claim:

• Write a strong demand letter and initial pleading: Use the complaint you file to start the civil action and your settlement demand letters to prime the insurer for paying more to close your case.

• Build your case: The anchoring effect is more likely to work when you have leverage. Therefore, you must act so the other side feels pressured to make large concessions during the negotiation. This means researching the elements needed to prove each cause of action and then using informal investigation, expert witnesses, and pretrial discovery to get evidence to support each element. You can also give the opposing party case citations that support your positions.

• Determine the zone of possible agreement (ZOPA): After assessing your case’s strength, use experience, past case results, and jury verdict reports to determine the ZOPA during the negotiations.

• Set a reasonable anchor: You risk anchoring failing if your opening number is unreasonable and the other side has prepared its case and better understands likely outcomes if your lawsuit goes to trial. Indeed, the anchor could be a nonstarter that stalls negotiations. This risk is significant when dealing with insurance companies (Geico, State Farm, Travelers, etc.), self-insured employers, and third-party claims administrators such as Sedgwick, Corvel, ESIS, and Gallagher Bassett, who spend a lot of money on data analytics.

• Make the opening demand when you have the information needed to determine fair value: You do not need to wait until formal negotiations start to give an anchor number. Make your demands before then. Research suggests the anchoring effect is durable; it lasts a long time. 

What are Some Effective Ways to Counteract the Anchoring Effect in Negotiations? What to Do When the Other Side Uses Anchoring in a Negotiation

The other party may use the anchoring effect against you, making the first offer or demand in the negotiation.

We hope you use the information in this article to recognize the other party dropped the first anchor. And then defuse it.

Here are ways to respond to the other side’s anchor in negotiation:

• Do not accept the first settlement offer. Ever.

• Ask for justification: Before responding with a counteroffer, ask the other party how it calculated its initial demand. Specifically, ask for evidence, documents, judicial precedent (in law), and data to support the number. Their answer will allow you to explain why the anchor is unreasonable before you counter.

• Ask for a new offer: If the other party’s initial offer is outside your acceptable range of outcomes, ask for a better proposal within your target boundaries before you counter. The other side may refuse to “bid against itself,” but you can set the tone for the negotiation.

• Make a counteroffer with data: You can respond to an unacceptable anchor number by making a counteroffer and explaining the facts that support your offer. Indeed, we recommend using the counteroffer as a second anchor. Ask the other side to explain why your facts, evidence, or case law is wrong when it responds.

• Focus on other terms before returning to numbers: You can respond to an anchor by switching the focus to other parts of a potential agreement. For example, in workers compensation, you may ask what medical treatment the insurer will pay for if you settle or if the employer will allow you to keep your job instead of requiring a resignation and release.

We also recommend selecting two numbers before negotiations to prevent the anchoring bias from influencing you.

First, determine a goal range. Aim for a result in this range.

Second, set a reservation price. This number is your “bottom line.” But make sure you are willing to walk away from the negotiations if the other side’s best offer is below this figure.

Helping Accident Victims and Injured Workers Negotiate More

Negotiating intimidates many.

And even those who like to “haggle” over price feel anxiety when negotiating with an insurance company about a lawsuit’s value. This feeling comes from having limited experience with the law.

You can take your chances alone.

Or you can hire a top-rated personal injury attorney to use all available litigation strategies and negotiation tactics, including anchoring, to get the best possible result.

Call us now: (804) 251-1620 or (757) 810-5614.