Would you rather earn $50,000 or $100,000? It turns out the answer is very different depending on the salaries of others. A Harvard study found that over half its’ respondents would prefer to live in a world where they earned $50,000 and others earned $25,000, rather than live in a world where they earned $100,000 and others earned $200,000. In short, people care more about their success relative to others than the absolute success they achieve.
Why is this, and what impact does it have on our negotiations?
First and foremost, we are creatures of comparison. It is very difficult for us to gauge success without it. In his 2009 book Predictably Irrational, Dan Ariely discusses this fact’s impact on our purchasing decisions: Williams Sonoma launched its first bread maker at a price of $250 dollars with little success. It was not until they introduced a larger version, costing $375, that the $250 bread maker started to sell. Why the change in sales? Without the $375 version, we had nothing to compare the $250 version to.
We couldn’t tell if it was a good deal or not.
All of this has significant implications for our negotiations. We often judge our success throughout the negotiation by comparing the value we receive in the deal to the value the other side receives. We feel good if we end up paying $250 and they pay $375. We are happy if we make $50,000 and the other side makes $25,000. We get so caught up in our relative success, we forget that $100,000 was an option.
So what do we do about this in our negotiations?
Cut the Anchor
How does the $375 bread maker show us that the $250 version is a good deal? It serves as an Anchor.
In their 1974 study Tversky and Kahneman asked participants to guess the percentage of African countries in the UN. Before participants could answer, they had to spin a wheel numbered from 1 to 100. The wheel was rigged to land on either 10 or 65.
What did they find?
Participants who spun a 65 answered 20% higher than those who spun a 10.
This is the power of an anchor. The first number we see provides context to the question that our minds simply cannot forget. Like a boat does not stray far from its anchor, our answers (or offers) are shockingly close to the context we are given.
More specifically, our perception of what is possible is skewed by the context provided to compare possibilities against.
$375 serves as an anchor that gives us a basis to compare other bread maker prices against. Since $250 is much less expensive, it is a great deal when compared to our anchor.
What we fail to ask ourselves is, how much should a bread maker really cost? How much do the materials cost? What is a reasonable markup and profit structure? What does the market dictate?
By letting the anchor influence our perception, we fail to reach the best possible outcome, instead settling for the one that seems great in comparison.
What can we do about this?
The short answer is to prepare. Prior to your negotiations, write down your first offer, as well as what you would accept. This provides you with your own anchor and gives you the confidence to ask for the best possible outcome. Additionally, I recommend making the first offer. The first offer will serve as an anchor to which all subsequent offers will be compared against.
Use the Comparison to your Advantage
Despite the impact of contextual anchors on our perceptions, we rarely think about the specific comparisons we use. Instead, we opt for those that are obvious and common. By being thoughtful about our comparisons, we can drastically increase the absolute value we get out of our negotiations.
In 2013, Jimmy Graham was negotiating a new contract with the NFL’s New Orleans Saints. When negotiating NFL contracts, teams and agents find other players they feel are of similar value and use their contracts as a basis for agreement. Final salaries tend to be very similar to those of the agreed upon player comps.
One important factor in deciding on player comps is position. Quarterback contracts are compared to other quarterback contracts and linebacker’s to other linebacker’s, etc..
Until Jimmy Graham.
Graham has always been listed as a tight end, a position that spends part of its time blocking (like a lineman) and the other part going out for passes (like a wide receiver). However, Jimmy Graham didn’t block that much. He spent most of his time going out for passes. In 2013, he caught more touchdowns than any wide receiver.
Why is this important? In 2013, the average wide receiver made 27% more than the average tight end.
Graham could have approached the Saints with a list of the highest paid tight ends, said he wanted to make a little more than them, and easily walked out as the highest paid tight end in the league. According to the easy comparison, it would have been a great deal for him.
Instead, Graham insisted on being compared to wide receivers. He changed the comparison to one that was more favorable to him. As a result, Jimmy Graham not only became the highest paid tight end, but the 6th highest paid wide receiver. He netted himself an additional $5M per year.
So is $50,000 better than $100,000?
No! Not for me, and (hopefully) not for you.
However, it may seem that way if we aren’t conscious of the context we are using and the impact that has on us and our negotiating partners.