Avoid the anchor bias in business transactions

Oct. 15, 2015
The anchor bias in business transactions is the common human tendency to rely too heavily on the first piece of information offered.

Imagine this scenario. You receive a call on your cell phone from someone who says he works for one of the big consolidators. He has heard a lot of good things about your shop and he wants to talk. His company is very interested in expanding in your area, and his company only partners with the best shop owners around. He used to be a shop owner and he knows how the industry is changing and knows what a good partner his current employer has been to him. He knows you would be a great fit for his organization. “Let’s get together, maybe for coffee or lunch,” he says. “Or perhaps I can stop by for a quick shop tour.”

You are naturally curious, and a bit flattered that this big organization thinks highly of you and is talking about you on a first name basis (even if you don’t tell him that). It is a nice change to hear someone say you are doing a good job after what seems like years of being told you are not quick enough, cheap enough or good enough by your customer base.

You want to know more but don’t want to give away too much. You tell him everything has a price but you won’t go cheap. He assures you his company pays up for companies like yours, and in your area you can expect to get at least 4x (5x, 10x, pick your multiple). They normally don’t pay that high, but you have such a good reputation and business, and they are serious about expanding, they are willing to make an exception. Besides, now is a great time to sell because we’re paying more to good shops than we ever have.

Anchor Bias

What just happened? Your contact is engaging in psychological gamesmanship known as anchoring. The anchor bias in business transactions is the common human tendency to rely too heavily on the first piece of information offered. Once an anchor is set subsequent judgments are formed by moving away from that anchor. For example, consider a used car, where the initial price offered sets the starting point for negotiations. Even if a higher multiple is negotiated, it still may be lower than the true economic value of your business.

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