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Choiceology: Episode 6


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Focusing on a single data point to the exclusion of other information: It’s a tried-and-true negotiating strategy, and it can quickly skew your judgment.

When you set out to buy something—a car, for example, or a laptop or some small gadget for your kitchen—you analyze the features and the style and the utility of the thing, and then you make a choice. But it turns out that there’s a psychological force that can influence what you’re willing to pay.

On this episode of Choiceology with Dan Heath, we examine a bias that affects how you perceive gains and losses, how you negotiate deals, and the way you think about value.

  • The episode begins with legendary sports agent Leigh Steinberg. He describes his dramatic first attempt at negotiating a contract for a client joining the National Football League. You can read more about his experiences in the sports world in his book The Agent.
  • You’ll hear an experiment based on Daniel Kahneman and Amos Tversky’s early studies that demonstrates the bias in real time.
  • And lawyer, mediator and conflict resolution expert John Curtis explains how everyone—from people selling their homes to police informants going into witness protection—can fall prey to this psychological trap.

Choiceology is an original podcast from Charles Schwab.

If you enjoy the show, please leave a rating or review on Apple Podcasts.

Click to show the transcript

Dan Heath: Im Dan Heath, and this is Choiceology.

Speaker 2: Now, for all the amazing things this machine does, it should sell for $300. But you wont pay that. You wont pay $250. You wont pay $200. You wont even pay $150. No, ladies and gentlemen, for this machine, a $300 value, youll only pay three easy monthly payments of $39.99.

Dan Heath: Maybe youve been there. Its late at night. You cant sleep. Youre flipping channels on the TV, and you end up being sucked into a commercial about spray-on hair, or a blanket with a head hole. How did this happen, and why does that blanket seem like such a good deal right now?

Were going to look at a simple trick that many late-night infomercials use to take advantage of a common bias. And while it might not seem that important to you while youre reading the return policy on your new sauna pants, it has a real impact on how you tackle some of lifes big decisions.

Speaker 3: Blue 42. Set. Hut. Hut. Hike.

Dan Heath: This is Choiceology, an original podcast from Charles Schwab. Its a show that reveals the hidden psychological forces that influence the way you make decisions, from choosing a new microwave to selling your old Harley. And we dont just reveal these forces. We give you ideas on how to minimize their impact so you can avoid costly mistakes.

Speaker 3: 110. Hut, hut, hike.

Leigh Steinberg: My name is Leigh Steinberg. Im CEO of Steinberg Sports and Entertainment.

Dan Heath: Leigh Steinberg is a sports agent. Hes represented more than 300 professional athletes in his long career. But it all started with one deal.

Leigh Steinberg: I was attending UC Berkeley in the late 60s, when it was the vortex of social change. So I was going to law school, and I was working my way through school as a grad counselor in an undergraduate dorm. They moved the football team into the dorm, and one of the students was Steve Bartkowski, who was the quarterback.

Dan Heath: Steve Bartkowski was not your average quarterback. He was a consensus All-American in his senior season in 1974, when he led the nation in passing. That year, he threw for 2,580 yards, and 12 touchdowns, with a completion rate of 56%. Pretty impressive stats. He was clearly destined for bigger things.

Leigh Steinberg: And in 1975, he became the very first pick in the first round of the NFL draft.

Dan Heath: The Atlanta Falcons needed a quarterback, and they picked Bartkowski.

Leigh Steinberg: And I had been out of law school for a while, traveling the world, and before Id had a chance to take a traditional legal job, he asked me to represent him. So there I was brimming with legal experience, never having practiced law.

Dan Heath: Leigh Steinberg was inexperienced in a business that, at that point, barely existed.

Leigh Steinberg: I had no concept, because there really wasnt organized sports agency then. A team didnt have an obligation to even deal with an agent. They could hang up the phone and say, Sorry.

Dan Heath: Heres how the NFL draft process worked in 1975. Teams had one pick in each of 17 rounds, and once a team picked someone, it had exclusive rights to that player until the following season. So, the choice for the player was either to sign with the team or go back to school. And in Bartkowskis case, as a graduating college senior, going back to school wasnt really an option.

Leigh Steinberg: And he cannot play or report to training camp until he has a signed contract.

Dan Heath: It looks like the teams have most of the power in this situation, but Leigh Steinberg has a few levers he can pull. First, there was an alternative football league.

Leigh Steinberg: At this particular time, though, there was a league trying to compete with the NFL.

Dan Heath: The World Football League was a bit of a ragtag operation. It was only around for a couple of years in the 70s, but it made a big difference in this particular negotiation, because they were also interested in Bartkowski. Second …

Leigh Steinberg: He played the position of quarterback, which is the key on any team. Thats the player who touches the ball the most, its the team leader. So that is a critical building block for any team to have.

Dan Heath: And third, Steve Bartkowskis rugged good looks didnt hurt his prospects on the marketing side.

Leigh Steinberg: He was 64, with blue eyes and blond hair and dimples, so he was going to be a box office attraction for one of the few teams that was having problems selling tickets.

Dan Heath: So Steinberg has this short but compelling list of benefits to present to the Atlanta Falcons, to try to negotiate Steve Bartkowskis salary. To give you some perspective on this, the highest rookie contract for an NFL player to that point had been around $350,000. The Falcons had put $400,000 on the table, the richest offer in NFL history. But Steinberg had another number in mind.

Leigh Steinberg: $750,000 for four years.

Dan Heath: $750,000. Now, for modern sports fans, that number probably gave you a little chuckle. Tom Brady probably has a couple of trainers who make more money than that. So keep in mind here the effects of inflation over 40+ years. Anyway, the key thing is that $750,000 was more than double the highest rookie contract ever made to that point in the NFL.

The Atlanta Falcons general manager, Pat Peppler, was not pleased.

Leigh Steinberg: He asked me if I was smoking the thing for which Berkeley was very famous at the time. Well, he also told me that there was a particular place in my body where I could take that offer and put it. So I tried to keep the tone of the conversation somewhat civil, but it would be clear that he wasnt real happy about things.

I think one of the keys in negotiating is to depersonalize the situation. This is not about me. This is not about my ego. This is not about my internal core. I have a job. I have to bleed all emotion out of it. This is about being a warrior, and having my mind and emotions as calm as possible, so that I can use my brain as well as possible and be analytical.

Dan Heath: Steinberg was able to brush off Pat Pepplers insults because he knew that the Falcons were desperate for a star quarterback. They wanted Bartkowski so much that they had traded away another player so the team could move into position for that first draft pick.

Leigh Steinberg: So there already was an indication that they coveted him strongly, and then the Atlanta Falcons had a track record where they had been 4-12 the year prior. They had not played very well. Their incumbent quarterback had thrown a lot of interceptions, and they needed to replace him. Their attendance had been poor the year before. Fans had put paper bags over their heads while they were watching the team to indicate their displeasure. And so it was really critical, and it was clear that they needed this player.

Dan Heath: Steinberg figured that the Falcons would end up losing more money by not hiring Bartkowski, through poor team performance and lost ticket sales, than they would by paying for the bigger contract.

Leigh Steinberg: If they thought about it correctly … Because my job is not to push things down peoples throats. Its to give them a rationale that they can sell, which is that if youre ever going to make a move to pay a player more, and if youre ever going to spend the extra dollars, this will send a signal to your fans that youre serious about trying to enhance the team. Youre doing whats in the fans best interest, and there will be widespread praise for you for doing this.

Dan Heath: Here we are at the moment of truth. If youre Steve Bartkowski, youve got to be stressed out. Youve got a good offer from an upstart alternative league, but you dont grow up wanting to play in the World Football League. You want to be an NFL star. Your agent, who has never done this before, has asked for a comparatively astronomical sum from the NFL team that wants you. Spring training is just around the corner. What if hes pushed them too far? What if it all falls apart?

Leigh Steinberg: A deadline was coming. We just made it clear that we were coming to decision point. The deadline was coming. Deadline was coming.

Dan Heath: Meanwhile, if youre the general manager for the Atlanta Falcons, youre stressed, too. How can you justify to the owner spending more than anyone ever has on a player?

Leigh Steinberg: Deadline was coming. Deadline was coming.

Dan Heath: What if it doesnt work out? Youll look like a buffoon.

Leigh Steinberg: We were coming to decision point.

So they agreed to our figure.

Dan Heath: Well, not quite. But close. Remember, $750,000 was their starting point.

Leigh Steinberg: He signed for $600,000, and we got the largest rookie contract in NFL history.

Dan Heath: This was massive news in the sports world.

Leigh Steinberg: Nothing prepared me for the fact that we arrived in Atlanta to sign the contract the night prior, and there were huge crowds at the airport pressing against the police line. There were klieg lights flashing in the sky, like for a movie premiere. And the first thing we heard was, We interrupt the Johnny Carson Show to bring you a special news bulletin. Steve Bartkowski and his attorney have just arrived at the Atlanta airport. We switch you live for an in-depth interview.

Dan Heath: Dont forget that this was Leigh Steinbergs first client. How did Bartkowski feel about his agent?

Leigh Steinberg: Well, he was ecstatic. Again, remember that, think $600,000, think $6,000,000, or think more, because the price of gas in those days was 30 cents a gallon. You could still buy a Coca-Cola for 20 cents. Movie tickets were 45 or 50 cents. So it was a different era.

Dan Heath: Steve Bartkowski played for the Atlanta Falcons from 1975 to 1985 and still holds almost every Falcons passing record. Leigh Steinberg is CEO of Steinberg Sports and Entertainment. Hes also the author of two books, including The Agent: My 40-year Career Making Deals and Changing the Game. Ive got a link to his books in the show notes.

Oh yeah, and there was a movie inspired by Leigh Steinberg that you may have heard of. Its called Jerry McGuire. Leigh is the real Jerry McGuire.

So that particular high-stakes negotiation worked out for Leigh Steinberg and his client big-time. But you could look at the story and argue, it was just beginners luck for Steinberg. He was in the right place at the right time. It was basically coincidence, after all, that he came to represent one of the best rookie players. And the Atlanta Falcons desperately needed a star quarterback. Things just kind of went his way.

But we think Steinbergs success owes more to strategy than to luck. Theres another angle to this story. It has to do with the bias to which were all susceptible, one that Steinberg used to his advantage.

Leigh Steinberg: The key was to set the stage, and to try and create an expectation and understanding that this contract was going to be different from what had happened in the past, and to try and put some form of sticker shock up-front, because if we had started at a figure, and simply inched along in offer and counteroffer, we might never have gotten to where we needed to be. So to do that, there needed to be a bold statement, a bold way of commencing the negotiations, that would send shock and awe into the decision-making structure of the Falcons.

Dan Heath: Steinberg had used an old trick. Its basically the infomercial trick. The pitchman starts by telling you the blanket with the head hole is a $50 value. That $50 figure is what psychologists call an anchor, and it leads to the anchoring bias: The first information you get, the first impression, sets an anchor by which you judge subsequent information. Youre first told the blanket is worth 50 bucks, but you can buy it now for $14.99, and theyll throw in a vegetable slicer, and you feel like you made out like a bandit.

Stores use this trick on us all the time with their list prices. Lets say youre buying a microwave. You go into the store, and the sign on the model you like says $750. Too rich for my blood, you say to the store clerk, and youre just about to leave when the clerk explains that this is your lucky day, as the microwave just went on sale for $600. So you buy it. You walk out of the store a happy customer, even though your budget for a microwave was $500.

Thats basically what happened to the Atlanta Falcons. Their budget for a quarterback had been $400,000. They were anchoring on the previous largest contract, and going just a little higher. And then Leigh Steinberg comes along and says, No, no, the list price for this quarterback is $750,000. Hes setting a counter-anchor. But mostly its just a bluff, and the Falcons say, No, no, no. Thats too much for a quarterback. And on their way out the door, Steinberg says, You know what? We can do $600,000. And maybe the Falcons walked out feeling good.

Thats pretty clever. And of course, negotiations of all kinds often turn on who can convince the other side that their anchor is the right one.

The anchoring bias was first theorized by Amos Tversky and Daniel Kahneman in the 1970s. They did a number of studies that demonstrated the measurable influence of anchoring information. Were going to re-create one of their classic studies, so you can see the anchoring bias in real time. Weve gathered several willing participants. OK, we pried a few folks away from their desk with the promise of free coffee. To spin the …

Speaker 5: Wheel of random numbers.

Dan Heath: There are no fortunes to be won here, sadly. The subjects have been asked individually to spin the wheel and note the number it lands on.

Speaker 6: I have the number 10.

Dan Heath: Now, weve asked the subjects to estimate something. We asked them for their best guess on this question: Of all the nations in the UN, what percentage are African nations?

Speaker 7: What percentage of United Nations countries are African …

Dan Heath: But heres what our participants dont realize: The wheel of random numbers—it isnt actually random. Its been rigged to always land on either the number 10 or the number 65.

Speaker 8: 65.

Dan Heath: So now, essentially, we have two groups. One group that got number 10 for their supposedly random number, and one group that got the number 65. And heres where it gets interesting.

Speaker 9: That is a 65.

Speaker 7: Now, I want you to …

Dan Heath: Amazingly, the seemingly random numbers from the roulette wheel skewed their answers. People who had seen the number 10 said, on average, that 20 percent of the nations in the UN were African.

Speaker 10: I think 12 percent …

Speaker 11: 15 percent.

Speaker 10: … countries in the UN are African.

Speaker 12: 17 percent.

Dan Heath: People who had seen the number 65 said, on average, 45 percent.

Speaker 13: Um, 42 percent.

Speaker 14: 37.

Speaker 15: 38.

Dan Heath: Isnt that bizarre? The mere presence of these numbers, 10 and 65, which had nothing to do with the UN, or countries, or Africa, still had a measurable effect on peoples estimates. Imagine what an opening bid in a football contract negotiation can do, or an asking price for a new house.

Oh, and by the way, if youre curious, the current percentage of African nations in the UN, its about 28 percent.

How can you use this information about anchoring bias to make better decisions in your own life? One of the best antidotes to this bias is to slow the decision-making process down. Its not always possible, but if you feel under pressure to make a quick decision, youre more likely to be influenced by anchoring.

Thats why infomercials always have a countdown. If you had time to reflect on the actual value of the blanket with the head hole, you might grow to realize that no human being would ever pay $50 for that thing. The real anchor is more like zero, or possibly even negative. I will pay you to remove that head hole blanket from my home.

One of the main methods to reduce the influence of the anchoring bias is to search out objective data.

John Curtis: Yes. My name is John Curtis, and Im a lawyer, a mediator and a conflict-resolution expert. Most of my focus is really on making sure people dont get taken advantage of by anchoring.

Dan Heath: John Curtis tries to help his clients understand whether or not information theyre anchored to is reasonable.

John Curtis: So if youre going to set an anchor, youve got to do the research. Sometimes its very difficult to set an anchor, because there are things you dont know.

Dan Heath: For example, the Atlanta Falcons might have suspected that Steve Bartkowski wasnt keen to play in that fly-by-night World Football League. If they could have trusted that he was an NFL-only kind of guy, that bit of information might have saved them a lot of money in negotiating his contract. But they didnt really know it.

Fortunately, there are all sorts of decisions where the necessary information is available if youre willing to do a bit of digging.

John Curtis: So when police are negotiating with criminal informants, they often have to negotiate a deal for these people to kind of exit their existing lives, so to speak, because theyre basically going to have to move on when they rat out on their friends. And one of the things that often comes up, as you might imagine, is the purchase of their home, their various assets. And it turns out one of the most difficult negotiations is over their Harley.

Dan Heath: Just a quick time out to observe that there is someone at work right now whose job it is to negotiate with criminal snitches over the value of their household items. Just sit with that. And apparently, its a pretty hard job when it comes to things like Harleys, because the informants …

John Curtis: They often have an inflated sense of what their Harley, their motorbike, might be worth. Its perhaps the most important object they have. Their identity is all tied up in it.

Dan Heath: That inflated sense of value might be driven by sentimentality as much as anchoring, but the point is that to get a fair price, you can just go check the Blue Book value of the bike.

Lets look at another common scenario where anchoring bias rears its head: selling your home.

John Curtis: The listing price on your house, thats an anchor.

Dan Heath: OK, so you bought a house for $250,000. Three years later, youre ready to sell it, but the markets dropped. The Realtor tells you, you should price it at $229,000. And what do you say? No way. Not one dollar less than what I paid. To price it at $229, it almost feels like the potential buyers would be cheating you somehow. You actually feel indignant about it.

This is a classic anchoring situation, combined with a generous portion of loss aversion. Heres the reality: The only day the sales price of your house is relevant is the day you sign the contract. From that point on, it ceases to matter. Your house is worth what the market thinks its worth, period.

Its like if you buy a share of stock for $100 bucks, and then three years later, if the market price is $80, you cant be like, Well, no, thats not fair. Im holding out for what I paid. I mean, you certainly can hold out. The market might come back, or it might not. But one thing you can be absolutely sure of is that your nostalgia for $100 shares is not going to move the market in your direction.

Youre listening to Choiceology, an original podcast from Charles Schwab. Schwab has an article on how anchoring bias may be affecting your investment decisions. The article contains some really useful information on stock evaluation factors. You can find that article in the show notes—or by visiting

The tricky thing is when you dont have obvious market data, like we do with cars and houses. What should you spend on an engagement ring, for instance? Its easy to imagine a world where the ring is not an investment or an asset, so much as just a symbol. Maybe everybody would get the same kind of ring, more like a mans wedding band, and then couples could make it special by engraving thoughtful things on it. Whatever. The point is, theres no natural anchor for the proper amount of money to spend on an engagement right.

So then De Beers, the diamond cartel, comes along in the 1930s with an ad campaign that says, Spend a months worth of salary on a ring. And boom, they had pulled a Steinberg on every marriageable man in the world. That is sneaky anchoring. And then in the 1980s, they doubled it to two months. Why? Because they can, and because it works.

In this scenario, were the Atlanta Falcons.

Can we fight back? I want to leave you with one last suggestion. I bid in an online auction recently for some odd but beautiful-looking glass bowls designed by an artist. And let me assure you that before that day, I did not have a to-do list item that read, Buy some odd but beautiful-looking glass bowls. It was a total impulse buy. Worse, it was an impulse buy with no real market data. No anchor.

Whats an odd glass bowl worth? If you anchor in the artists effort, the years of experience needed to develop expertise, and the many, many hours spent in creation, its easy to come up with an estimate in the thousands of dollars. If you think about a glass bowl as more like a vessel, something to hold keys or jellybeans, well, then you can get one of those at the store for 10 bucks. So which is it? Thousands or 10 bucks?

As I watched the auction, procrastinating my work, I had an inspiration: Wouldnt those bowls make a good Christmas gift? I had someone in mind. So I basically resolved not to bid more than I would have spent on that persons Christmas gift. That made my strategy easy and anxiety-free. I had an anchor. And I won. Lucky me. I think.

This is a form of the opportunity cost question we saw in a previous episode: What else could I do with the same money? When youre watching that infomercial, ask what else you could buy for $14.99. Chances are, you can do better than the head hole blanket.

But in the Bartkowski situation, the Falcons probably couldnt have done better than Bartkowski for the same money. They did pay a lot, and its possible they were out-negotiated, but they made a good call for the team.

Whats the opportunity cost for an engagement ring, and is it unromantic to think that way? Im staying out of this one. Its a minefield. But you better act fast before De Beers decides to set a new anchor at 6 months salary.

Speaker 3: Blue 42. Set. Hut. Hut. Hike!

Dan Heath: Youve been listening to Choiceology, an original podcast from Charles Schwab. If youve enjoyed the show, leave us a review on Apple podcasts. It helps other people find the show. And while youre there, you can subscribe for free. Same goes for other podcasting apps. Subscribe, and youll never miss an episode.

Next time on the show, another psychological effect that causes teenagers to see things in black and white—and often blinds us to the bigger picture. Im Dan Heath. Talk to you next time.

Disclosures: All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed. Investing involves risk, including risk of loss.

Important Disclosures:

All expressions of opinion are subject to change without notice in reaction to shifting market conditions.

Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.

Investing involves risk, including risk of loss.

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