7 Deadly Assumptions #1: Anchoring – Leadership Network Blog
My family and I enjoy watching the show American Pickers. It’s a show about a couple of guys, Mike and Frank, who travel the country looking for junk to ‘pick’ and then turn around and sell to collectors for a nice profit. Its enjoyable to watch, and educational as well, vicariously experiencing Americana one piece of junk at a time.
One of the things you get to see a lot of on American Pickers is negotiating. Mike and Frank are constantly matching wits with collectors, trying to get the best deal that will net them a nice profit in the end. One of the keys to the whole negotiation process is setting the initial price to open the negotiations. This ‘anchor price’ serves as the foundation of negotiations, resulting in either getting a steal, walking away with nothing, or being stuck with an over-valued item. Sometimes the anchor price is based on known market value for a particular item, but often times it is a somewhat arbitrary number pulled out of the air. The ‘privilege’ of naming the opening bid is often passed back and forth in hopes that the other person will make a mistake in setting the anchor price. With only one of the three possible outcomes mentioned being positive, a lot is riding on this initial number. Most of the time, Mike and Frank walk away with something they can turn a profit on. But sometimes they end up having to cut their losses.
The Principle Behind Anchoring
The influence of the anchor price is a result of a principle some refer to as “arbitrary coherence”. The idea is that, although an initial price may be arbitrary, once that price is established in our minds, not only does it shape current prices, but it has a profound impact on future prices as well.
Dan Ariely, author of Predictably Irrational, writes of an experiment he and a couple of professors (one from MIT’s Sloan School of Management, the other from Carnegie Mellon University) conducted with 55 MBA students at MIT. They wanted to see if introducing an arbitrary number to this group of future marketing pros would be enough to create an anchor, and whether or not that initial anchor would have long term influence.
The experiment involved students bidding on four random items:
- A cordless trackball
- A cordless keyboard and mouse
- A design book
- A one-pound box of Belgian chocolates by Neuhaus.
Forms were passed out listing each of the four items. According to Ariely, here’s what happened next:
“Now I want you to write the last two digits of your social security number at the top of the page,” [Drazen] instructed. “And then write them again next to each of the items in the form of a price. In other words, if the last two digits are twenty-three, write twenty-three dollars.”
“Now when you’re finished with that,” he added, “I want you to indicate on your sheets—with a simple yes or no—whether you would pay that amount for each of the products.”
When the students had finished answering yes or no to each item, Drazen asked them to write down the maximum amount they were willing to pay for each of the products (their bids). Once they had written down their bids, the students passed the sheets up to me and I entered their responses into my laptop and announced the winners. One by one the student who had made the highest bid for each of the products would step up to the front of the class, pay for the product, and take it with them.
The students enjoyed this class exercise, but when I asked them if they felt that writing down the last two digits of their social security numbers had influenced their final bids, they quickly dismissed my suggestion. No way!
When I got back to my office, I analyzed the data. Did the digits from the social security numbers serve as anchors? Remarkably, they did: the students with the highest-ending social security digits (from 80 to 99) bid highest, while those with the lowest-ending numbers (1 to 20) bid lowest. The top 20 percent, for instance, bid an average of $56 for the cordless keyboard; the bottom 20 percent bid an average of $16. In the end, we could see that students with social security numbers ending in the upper 20 percent placed bids that were 216 to 346 percent higher than those of the students with social security numbers ending in the lowest 20 percent.
The same phenomenon exists in the realm of ideas as well. When we are processing information in strategic conversations, the first idea that is generated as a solution to the current opportunity or obstacle carries a great deal of weight in our minds, becoming a strong factor in influencing final decisions. We see this all the time at Leadership Network. Executive teams, motivated to develop robust solutions to their strategic challenges, base their decisions on ideas and information gleaned early in the collaborative process. Once that ‘anchor’ is set, remaining knowledge and insight gets filtered out, thus limiting possibilities and outcomes as later ideas are never fully considered.
This common occurrence is based on our first Deadly Assumption: Anchoring. It’s the assumption that our first ideas are the best ideas. Over the past several decades, studies have shown how the brain’s tendency to stick with familiar ideas can literally blind us to superior solutions. As management professor at the Kellogg School, Loran Nordgen explains, “Early ideas tend to have disproportionate influence over the rest of the conversation. They establish the kinds of norms, or cement the idea of what are appropriate examples or potential solutions for the problem.”
How to Overcome Anchoring
Much of what we do at Leadership Network is built around overcoming anchoring (and the other assumptions as well). From the location and structure of our collaborative experiences, to the people we select to be in the room, both as participants and ‘experts’. While there isn’t time to cover everything, here are a few recommendations for overcoming anchoring in your strategic conversations:
- Patience: Allow Insights to Emerge. In all of our experiences, we bring a great deal of knowledge into the conversation in a short period of time to allow for insights to emerge. Even so, many participants are quick to jump to solutions before everything is heard. Teams want to move to ‘What Will Be’ before they have considered all that ‘Could Be’. The next time you are planning a strategic conversation with you team, make a rule that no judgments are made, no ideas are discarded, and no decisions are made until all the knowledge has been heard, considered, and tested. How do you test ideas and insights? Look at suggestion #2.
- Scenario Planning: The Key is Constraints. A great way to test ideas and insights is through scenario planning. Scenario planning pushes individuals and teams to work from a determined set of assumptions, allowing them to consider possible outcomes before deciding on which ideas to develop. The most effective scenarios involve a set of constraints participants much work within (limited budget, no staff, etc). If you give teams unlimited resources (no constraints), you’ll most likely get another version of what they’re already doing. However, utilizing constraints forces teams to operate from a different perspective.
- Individual Exercises: Don’t Be Afraid to Go it Alone. Individual exercises are important for many reasons, not the least of which is allowing every voice to be heard. Typical group brainstorming allows the dominant voices to control and limit the conversation. Once an initial idea is articulated, most of the ideas that follow are some other version of the anchor idea. Many more ideas are left unheard. When you give team members a chance to write out and articulate several ideas without the influence of others, a broader scope of ideas and insights are shared, opening the door for better decisions to be made.
- Engage ‘Unusual Suspects’. I read a quote some time ago that went something like this: “If you always sit with the people you came with, you’ll walk away with no new ideas.” When it comes to strategic conversations, we often find ourselves interacting with the same ‘usual suspects’ over and over again. We get comfortable with people we know and whose ideas align with our own. That is a recipe for being bound by anchor ideas. For your next strategy session, be intentional about seeking out a few ‘unusual suspects’, people that have radically different perspectives and ideas than your own. While you may toss out some of what they bring to the conversation, just having alternative voices in the room will enrich your conversations and enhance your decision making.