Our next psychological tool relates to a concept called anchoring, which basically means that you and I anchor on an initial value when estimating the value of uncertain objects. Let's try an experiment. Please get your pencil and paper ready. Now here is the experiment. Think of the last three digits of your phone number, add 400 to them. Pull out a calculator if you need one and write down the total. So you should have a number that's the last three digits of your phones number plus 400. Attila the Hun was one of the most feared conquerors in world history. He was eventually defeated during the Common Era, that is, AD. And my question to you is, was he defeated before or after the number you wrote down? Assuming that number is a AD year, was he defeated before or after that number? So write down the word before or after. So you should have two things written down, last three digits plus 400, and the word before or the word after. And then finally, write down the year. Again, during the common era in which that Attila the Hun was defeated. No fair, Googling to get the answer. Okay, when I do this experiment in class I ended up often with results that look like this. So on the left you have ranges for the last 3 digits of the phone number + 400. And on the right you have an average date of defeat of Attila the Hun. Now if you were a scientist sitting back and looking at that data, what does that data tell you? As you can see, as the phone numbers plus 400 increase, the dates of defeat of Attila the Hun also increase. In other words, the phone number influences the date that you chose for the defeat of Attila the Hun. By the way, the data defeat was 451. See if you got it right. So, this is what anchoring is all about, you can pick a completely random number. What does your phone number have to do with when that Attila the HUn was defeated? Nothing, but yet, we anchor, we latch on to a number that's thrown out when we're trying to deal with an uncertain question, such as the date of defeat of Attila the Hun. And it's not just ordinary people who fall into this trap, or tool. Specialist do as well. For example, I've got an experiment done with two sets of surgeons who specialize in lung disease. And so, the researcher developed the symptoms of somebody who might have lung disease. And went to one group of lung doctors and basically asked them, are the chances of this person having lung disease higher or lower than? And then the researcher picked a random probability. Let's say higher or lower than 20%. And the doctors wrote down either higher or lower. And then the researcher asked the doctors to write down, what do you think the chances are of this person having lung disease, okay? Then the researcher went to the second group of lung doctors, same symptoms. And asked them, do you think the chances of the person having lung disease are higher or lower? And then selected another random probability. And do you think the chances are higher or lower than this probability? They wrote higher or lower. What do you think the chances are? Okay, well, guess what happened? The two separate groups of lung doctors anchored on that random probability, let's say, the first random probability was 25% that the researcher threw out. The answers were close to 25% when they had to predict the chance of the person having lung disease. With a second group, let's say the random probability was 50%, then the probability that they selected clustered around 50%. So even with specialists such as these physicians, the anchoring trap is common. Now how does this relate to negotiation? One of the most important questions that you face in any negotiation is, who throws out the first price? Think about that for a second. I don't know if you have business experience, but what's the conventional wisdom, or what does your intuition tell you? If you're negotiating with me, do you want me to throw out the first price, or do you want to throw out the first price? Conventional wisdom says, always let the other side throw out the first price. What does anchoring say? Well, as you might guess, anchoring says, you should throw out the first price and try to anchor the other side to your number. For the seller you're going to throw out a high price. You want to anchor the other side to that high price. So we have a conflict, and whose right? Well, I think both sides are right. I think that you should follow the conventional wisdom when you are dealing with the sale of something where the value is very uncertain. Because if the other side throws out the first price, that's one way to obtain information about what the value actually is. But on the other hand, if you're selling something where you're fairly confident of the value, then you should throw out the first price and try to anchor the other side to either your high price or low price. The problem is, and my students often ask me about this dilemma. The problem is, what if both sides are pretty savvy and neither side wants to throw out the first price? Your first price choices are, it's either you or the other side. Then what do you do when there's a stalemate? Well, you can try something in case of a stalemate, that I'm calling an information exchange. Which is basically, neither side makes an offer or a counter offer, but instead you try to bring in facts that might be relevant to the value of the thing being sold. This is a strategy that's commonly used by attorneys when they are negotiating the settlement of litigation. There was a study done a number of years ago, and this was the conclusion from the study. In negotiations between lawyers, these negotiations might be less a series of offers and counteroffers and more a process of exchange of information. And so, by exchanging information, in this case by talking about the value of other similar cases, neither side is throwing out an offer, but eventually they're able to reach consensus. And so, if you do reach the stalemate situation where neither side is willing to throw out the first offer, I suggest an information exchange. And so that concludes our look at anchoring.