Much could be said about the influence of emotions in negotiations, and effective management is advisable. There are several psychological factors that affect Economy. Daniel Kahneman is a psychologist with dual American and Israeli nationality, who won the Nobel Prize in Economics in 2002. His approach focuses on how the way we perceive, and process information, influences our decision-making more than it seems.
In his work Thinking, fast and slow, Kahneman begins by distinguishing between two systems that operate in our brain: he calls the first one the automatic system and the second one the effortful system. System 1 operates quickly and automatically, with little or no effort and without a sense of voluntary control. System 2 focuses attention on demanding mental activities, including complex calculations.
System 2 operations are often associated with the subjective experience of acting, choosing, and concentrating. Systems 1 and 2 are always active while we are awake. System 1 acts automatically, and System 2 is normally in a comfortable, low-effort mode in which only a fraction of its capacity is occupied.
When System 1 encounters a difficulty, it calls on System 2 to suggest a more detailed and precise procedure that can solve the problem. You could say that human beings function on autopilot based on System 1, but if something does not add up, they turn to System 2.
From this perspective, Kahneman concludes that the best we can do is to reach a compromise: learn to recognise situations in which mistakes are likely and strive to avoid major mistakes when important things are at stake.
Kahneman’s book explains various unique phenomena that occur due to the synergy or lack of coordination between System 1 and System 2. One of these phenomena, which is undoubtedly of interest in the field of negotiations, is the effect of anchoring.
One of Kahneman’s experiments with his students involved using a wheel of fortune numbered from 1 to 100. This wheel was rigged and only stopped at 10 and 65. The number on the wheel of fortune was noted down. He then asked the students two questions:
Is the percentage of African nations among United Nations (UN) members greater or less than the number just written?
What is the estimated percentage of African nations in the UN?
When the wheel of fortune landed on 10, the average response regarding the percentage of African countries in the UN was 25%. However, when the wheel of fortune landed on 65, the average response regarding the percentage of African countries was 45%.
This is the anchor effect. The number given when the question is asked conditions the result, anchoring it. However, this phenomenon has no logical explanation, unless we resort to the explanation of autopilot and the relationships between System 1 and System 2.
Another experiment proposed by Kanheman was based on the following questions:
Was Gandhi approximately one hundred and forty-four years old when he died?
How old was Gandhi when he died?
It is obvious that Gandhi did not live to be 144 years old, but the outcome of this question is conditioned by that figure. It is significantly different than if the question were whether he was more or less than 35 years old when he died, which may seem surprising.
This anchoring effect is linked to the priming effect, where compatible evidence is selectively elicited. In this way, System 1 does everything it can to construct a world in which the anchor is the true world. It is one of the manifestations of associative coherence that Kahneman studies in his book.
What is the relevance of anchoring in the context of negotiations? The classic form of the anchoring effect in this area is the first offer. In many cases, the outcome of a negotiation is conditioned by the amount of the first offer. If someone makes an initial offer of 200, it would seem difficult to justify making a counteroffer of 15. But why shouldn’t this counteroffer be made?
The first offer anchors the various concessions made by the parties. This is particularly clear when the first offer consists of the clauses of a written contract draft. If negotiations take place based on the proposed wording, the negotiation will have been anchored and will be better focused for the party making this first offer.
A phenomenon linked to anchoring, which can provide key information in a negotiation, is the pace of concessions. If A’s first offer is 200 and B’s counteroffer is 100, A’s next offer will give us information about their reserve price, depending on whether their next offer is 150 or, conversely, 190. If their subsequent pace of concessions is 10 or 50.
The anchor effect is something that can be explained by the interrelation between System 1 and System 2. In other words, because autopilot is engaged and we do not carefully analyse each and every statement that is processed daily. This power of suggestion of anchoring is unjustified, and one must be especially alert in negotiation contexts, as it is a way of gaining positions and focusing on the interests of one party. The best response to an exorbitant first offer is a minimal counteroffer and, from there, to begin negotiating. The pace of concessions by each party will provide information about their respective reserve prices. When faced with negotiation anchors, it is best to weigh anchor with a realistic counteroffer.
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