Advanced Negotiating: Frames and Anchors: Awesomeness Chapter 22
My third recommendation on money and business
This is the full twenty second chapter of my book, and first on the subject of relationships, from my book Awesomeness: An Amateur Potpourri of a How-To-Guide.
See part 21: Negotiating 101, here.
Suppose you received the following two proposals:
“Problem 1… Imagine that the U.S. is preparing for the outbreak of an unusual Asian disease, which is expected to kill 600 people. Two alternative programs to combat the disease have been proposed. Assume that the exact scientific estimates of the consequences of the programs are as follows:
“If Program A is adopted, 200 people will be saved.
“If Program B is adopted, there is a one-third probability that 600 people will be saved and a two-thirds probability that no people will be saved.
“Which of the two programs do you favor?” [1]
This question comes from Nobel Prize winner Daniel Kahneman’s excellent book Thinking Fast and Slow, and the survey results showed that 72 percent of respondents preferred the more reliable Program A, as opposed to 28 percent who supported Program B. Apparently, people generally think we should take the sure bet and save 200 people rather than roll the dice.
But another group of people were offered two different programs to select between,
“If Program C is adopted, 400 people will die.
“If Program D is adopted, there is a one-third probability that nobody will die and a two-thirds probability that 600 people will die.” [2]
I hope you’ve noticed that these two programs are completely identical to the first two with the only exception being that they are worded slightly differently. Well, what happened? The results flipped. This time 78% supported the roll of the dice and only 22% supported the reliable option.
The bias this question elucidates is that people will gravitate toward things that are framed as gains and away from things that are framed as losses. “Lives saved” is a gain and “people will die” is a loss. This is a consistent cognitive bias our species is stuck with. And if there is one lesson to be learned from psychology, it is that people have intrinsic biases.
As Kahneman and others have shown, people will generally become irrationally aggressive when there is a small chance of winning and irrationally conservative when there is a small chance of losing. In addition, they almost always underestimate the cost and time required, instead of the other way around. For example, the Sydney Opera House was supposed to cost $7 million. It ended up costing over $100 million and was finished over 10 years behind schedule.[3] People are overly loss averse and have an irrational fixation on not losing money on any particular transaction (i.e. “I’m into 123 Main street for X dollars, so I need to get at least that out of it if I am going to sell it”). Indeed, the list goes on.
What’s so important about these biases is that they make not only what we say, but also the way we frame any sort of interaction with other individuals so important. Two people can say the same thing, and one can be completely effective and one can be completely ineffective in conveying it. Someone who highlights losses will be less effective than someone who highlights gains. Someone who comes off mean-spirited will be less effective than someone who comes off empathetic and builds rapport with the buyer or seller.
To use an example from our office, our former bookkeeper used to complain about virtually everything, much of it admittedly legitimate. One day, she asked our operations manager why when the manager complained about a problem, people would listen, but when our bookkeeper complained, people seemed to not want to hear it. Our manager’s answer was that she tried to provide a potential solution as well. No one just wants to hear about more problems, but if a potential solution is also given, it makes the person more interested in taking that problem on.
So instead of just making your offer out of the blue, provide a narrative first. Explain why your offer will be low (or why it should be high if you are selling). By making your rationale ahead of time, you have framed the offer. Now it’s not some low ball offer, but an offer that makes sense.
In a recent negotiation for an apartment complex, I asked the owner to come to our office to meet with my brother and me. I then framed our offer by explaining the repairs that needed to be done to the property and the assumptions I had to add to his profit and loss statement (for example, he managed himself and so I had to put in a management fee). Then I explained that it needed perform at a certain level (have a certain cap rate for those in real estate) for it to work for us and showed them what offer price that justified.
And we got a discount big enough to justify buying the property.
Another technique that is critical to know is called anchoring. Daniel Kahneman again,
“…we told participants in the Exploratorium study about environmental damage caused by oil tankers in the Pacific Ocean and asked about their willingness to make an annual contribution ‘to save 50,000 offshore Pacific Coast seabirds from small offshore oil spills, until ways are found to prevent spills or require tanker owners to pay for the operation.’ This question requires intensity matching: the respondents are asked, in effect, to find the dollar amount of a contribution that matches the intensity of their feelings about the plight of the seabirds. Some of the visitors were first asked an anchoring question, such as “Would you be willing to pay $5…” before the point-blank question of how much they would contribute.
“When no anchor was mentioned, the visitors at the Exploratorium—generally an environmentally sensitive crowd—said they were willing to pay $64, on average. When the anchoring amount was only $5, contributions averaged $20. When the anchor was a rather extravagant $400, the willingness to pay rose to an average of $143.”[4]
Think about this example for a moment. The same types of people, randomly selected, reduced the amount they were willing to pay by 75 percent when given a low anchor and more than doubled it when given a high anchor.
Anchoring, as Daniel Kahneman defines it, “occurs when people consider a particular value for an unknown quantity before estimating that quantity. What happens is one of the most reliable and robust results of experimental psychology: the estimates stay close to the number that people considered—hence the image of an anchor.”[5] This can be a very powerful tool in any negotiation.
Our brains basically have two methods of thinking. In brief, there’s System 1 that could be thought of as our brain’s autopilot. It’s for recognizing faces or familiar symbols. Then there’s System 2, which is for more deliberate thinking such as math or abstract thought. The thing to remember is that System 2 is lazy as all hell. And System 1 is more than willing to oblige System 2 in its never-ending search for new ways to procrastinate.
Anchoring feeds System 1 something to hang onto, which proliferates up to System 2 and influences the rational mind when it comes time to buckle down and do some serious thinking. In fact, what it means is that unlike much of the negotiation advice you may have heard, sometimes it’s a good idea to make the first offer.
Many buyers or sellers have a completely unrealistic view of what something is worth (remember, most people are overly optimistic). Anchoring can help remove these delusions of grandeur and increase the odds of actually getting a deal done.
And what if someone uses a ridiculous anchor on you? Kahneman recommends what I would call the Toddler Tantrum method of negotiating,
“My advice to students when I taught negotiations was that if you think the other side has made an outrageous proposal, you should not come back with an equally outrageous counteroffer, creating a gap that will be difficult to bridge in further negotiations. Instead you should make a scene, storm out or threaten to do so, and make it clear—to yourself as well as the other side—that you will not continue the negotiation with that number on the table.” [6]
The key here is not disarming the other person, but invalidating the anchor to your own mind.
Much of life is a negotiation and framing and anchoring exist whether you like it or not. There will be frames and anchors floating around every negotiation you are in even if you despise the concept of them. So you better take them into account.
[1] Daniel Kahneman, Thinking Fast and Slow, Farrar, Straus and Giroux, Copyright 2011, Pg. 436
[2] Daniel Kahneman, Thinking Fast and Slow, Farrar, Straus and Giroux, Copyright 2011, Pg. 437
[3] “Sydney Opera House”, Wikipedia, http://en.wikipedia.org/wiki/Sydney_Opera_House, Accessed May 3, 2015
[4] Daniel Kahneman, Thinking Fast and Slow, Farrar, Straus and Giroux, Copyright 2011, Pg. 124-125
[5] Daniel Kahneman, Thinking Fast and Slow, Farrar, Straus and Giroux, Copyright 2011, Pg. 119-210
[6] Daniel Kahneman, Thinking Fast and Slow, Farrar, Straus and Giroux, Copyright 2011, Pg. 126
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