In a decision making or negotiation scenario, it is common human tendency to rely too heavily on the first piece of information offered- known as the Anchoring Effect.
Due to this cognitive bias, once an “anchor” is set, we will see any other information, keeping the anchor as a reference point.
This common human tendency is often used in a negotiation. e.g., when making a proposal for, say, an indemnity package that a seller might want to offer a buyer, the seller may wish to be the first person making a proposal and anchor the discussion to a point such that any counter proposal will stay close to the original offer and take that as a reference point.
However, this tactic should be used wisely, because it can backfire if you steer too far away from standard market practice or take positions that do not make sense in the commercial context.
Three points to keep in mind to get the best outcome when using the Anchoring Effect: (i) reserve it for your absolute must-have or more critical terms (ii) start slipping your anchor in the early stage conversations even before the deal is cooked – if the counter party continues to engage, then clearly it is not a deal breaker for them and you will land close to your desired outcome (iii) offer to hold the pen (i.e. prepare the first draft) at term sheet stage so that you can include your anchor in the very first draft the counterparty sees.
Also, be aware of when your counterparty is using this tactic and ensure you counteract it’s effects in negotiation!
