Do you know that the price you pay for certain items depends on the first price you notice? Let us go through an example below. The item could change but the thought process remains the same.
Consider the scenario where your wife insists on buying a chandelier for the new house. Since you have no idea how much a chandelier costs, you decide to check the price in a nearby store. The first chandelier the salesman shows you has a price tag of over 200 dollars.
You worry about shelling out 200 dollars and ask him for more options. He shows you another one in a similar price range.
When you mention you are looking for something cheaper, he walks you to a chandelier and says “This one has a 33% discount for this weekend.”
The second chandelier looks like a far better deal because it costs you a whopping 70$ lesser. The price seems reasonable and affordable.
Happy to have found a bargain, you rush home with a 140$ chandelier to tell your wife about the great deal you found.
Little do you know that the store next door has chandeliers that cost you anywhere between 80-125$. When you do, you feel like a child who exchanged a quarter for 3 nickels.
What just happened? How did you find a higher than average price as a better deal?
The reason – you fell victim to the anchoring bias.
I am writing a set of posts to help you identify how your brain plays games with you. This article is on the topic – The Anchoring Bias also called the anchoring effect. You can read about all the biases of the mind by clicking here.
What is the anchoring effect?
The anchoring effect is the tendency of the human mind to focus on the first available information. All the further available information tends to get compared with the information first offered.
The effect takes prominence when you do not have a clear idea of the price or the number beforehand.
For example, when you have no clue how much a chandelier costs and the first one shows a price tag of 220$, any chandelier offered at 150$ seems like a bargain.
If the first chandelier you looked at cost 150$, the chandelier you just purchased would not seem attractive anymore.
You and I have an urge to always compare the information with available information to make a decision.
The reason from evolution
The anchoring effect does not always have negative effects. Using an anchor is nature’s way of helping human beings arrive at results.
For example, if I ask you, “In which year did the bombing of Hiroshima and Nagasaki occur?”, how would you arrive at the answer?
If you know history well, you will know the answer like a mathematician knows his formulae. However, let us assume you are not very familiar with the dates in history, like me.
You would start with an event you are familiar with, in this case, the second world war. Again, you do not know for sure when WWII occurred but you can approximate the year as somewhere around 1935-1945. From the history lessons in school, you remember that the bombing of Hiroshima and Nagasaki ended WWII.
You can now roughly approximate the year of bombing as 1943. The right answer is 1945.
Using various anchors, the anchoring bias helped you arrive close to the answer. Our brain uses anchors to make a calculated guess on the answers we do not know for sure.
Experiment on anchoring bias:
Unfortunately, the anchoring bias causes us to use anchors even when we should not. Researchers Russo and Shoemaker performed a study by asking students when was Attila the Hun defeated. Before asking the question though, the students had to write down the last 2 digits of their phone number.
As baffling as it may sound, people with higher phone numbers chose later years as the year of Attila the Huns defeat.
In a similar experiment, Amos Tversky, a collaborator of Nobel prize winner Daniel Kahnemann, decided to dig deeper into the anchoring heuristic. They asked people to spin a wheel of fortune. After noting down the number on the wheel, they had to guess the number of member states the United Nations had.
The people who got a higher number on the wheel of fortune guessed a higher number of members of the UN.
The studies and experiments do not end with these 2 experiments. Multiple other studies around real estate, business, supermarkets, discount sales have confirmed the anchor effect time and again.
We all have the anchoring effect influencing us, sometimes for the good and sometimes for worse. Not only are we influenced by related anchors such as the first prize of the chandelier, but we are also influenced by random numbers such as phone numbers with Attila the Hun.
Are experts influenced by anchoring?
In an experiment, students and professional real estate agents toured a property, after which they had to estimate its value. The catch was, they were told that the property was currently listed on the newspaper ads at a price X. The value X was a randomly generated number.
As expected from the students, the higher the listed price, the higher the guesses were. You might expect the professional real estate agents to have done better. Unfortunately, they did not.
The experts based their estimates around the anchors too. They did a little better than the students, but not much.
Anchoring influences your decisions even when you are an expert. However, the degree of influence can depend on a similar decision made.
The anchoring heuristic can take shape in various forms other than the usual first information.
The bonus offer at the same price:
The Economist magazine ran an advertisement offering 3 subscription options
- The web-only option for 59$
- The print only option for 125$
- Both web and print at 125$
Did you think Economist was stupid by setting the price of both Web and Print at the same price as Print only? Well, they wanted you to think so.
In this advertisement, as expected, no one chose the Print only option. A majority chose the web and print option.
Here comes the interesting part. When the web and print option at 125$ was removed, a majority chose the web-only option at 59$. The print only option served as an anchor to make the web and print options at 125$ seem like the better choice. And of course, it did.
Anchoring bias examples in real life:
Anchoring heuristic examples occur daily around you and sometimes right under your nose.
In almost every store you visit, an anchor has been put in place to optimize sales. When you visit a store looking for a T-shirt, the expensive T-shirts are displayed on the front. A 120$ price tag you see first makes the 70$ T-shirt seem like a better deal.
The same goes for luxury brands. A 2000$ Prada shoulder bag sets an anchor for a 1000 $ clutch or wallet.
2. Buying cars:
You visit a car showroom to buy a car and the salesman states a price of 32,000$. You bargain and he reluctantly agrees after long rounds of discussion to a price of 26,700$.
You find the deal to be a bargain and thank the salesman for the discount. You pat yourself on your back for exhibiting the negotiation skills of a charmer.
You have no clue that he wanted to sell the car around 26,000 $ from the time you stepped into the store.
When the big e-commerce sites announce a sale, you wait for the deals. Your eyes light up when you notice a 50% off with the original price mentioned as 119$ with a strikethrough, followed by the current price as 59$.
Have you wondered what is the need to display the original price? Well, by now you should know that the original price sets an anchor and makes the offer seem better than it is.
Often, the original price gets buffed up during the sales just to make the offer seem more attractive.
4. Salary negotiations:
You attended an interview and cleared all the rounds. When it comes to the salary discussions, you hope for a pay scale of 90,000$. The recruiter shoots down all your hopes by stating the salary as 60,000$.
The jump from 60,000$ to 90,000$ seems too huge for a meaningful negotiation. You will now ask for 80,000$ instead due to the anchor set by 60,000$.
A famous tactic used during negotiations is to never make the first offer. Some agree with the tactic and some disagree. While making the first move has its other disadvantages, the advantage is that the person who puts the offer first on the table, sets an anchor.
5. Real Estate:
A common tactic used in real estate is what most people fall victim to. When you want to rent a house and approach a real estate agent, the first few houses you see seem much below your standards.
The pipes leak, the paint on the wall has worn off, the flooring is old, the wardrobes are creaky and the house has a peculiar odor. However, the rent of the house – 2000$.
You seem shocked to know that such a messy house costs 2000$. The trick the real estate played on you was that he never intended to sell this house to you. It was only an anchor to set your standards low.
Even though the agent said nothing, you have mentally decided that for 2000$ you cannot find a decent house. You believe you need to shell out close to 2500$ in rent for a reasonable place to stay.
The next few houses at 2500$ seem a better deal than they actually are, because of the negative image set by the 2000$ house. Had the agent showed you these houses first you would have mentioned that 2500$ was above your expected budget.
5. Organizational behavior
The performance of people can serve as the wrong anchor. For example, the level of skills in an organization is determined by how skilled the topmost employee is. Growth-hungry employees try to surpass the level of the best performer.
The higher the skill level of the best employee, the better the overall talent level. When the best employee himself has a lot of ground to cover, the others lag far behind.
How to avoid anchoring bias?
The bad news is that you cannot stop your mind from being vulnerable to the anchoring bias. First available information will almost always place an anchor in your head whether you are investing a huge sum or buying a small item.
A discount on Amazon will make your stomach tingle. A 200$ wine bottle will make a 100$ seem affordable. The top-end model of a car will make the second-best model seem like a better deal.
All you can do is stop anchoring bias from affecting your decisions. You cannot stop the bias from triggering thoughts in your head. But, using some techniques mentioned below you can stop anchoring from effecting your decisions:
1. Know you are vulnerable:
When you walk into a store know that the store will use the anchor effect to urge you to buy a higher-priced item. Having the awareness of falling victim helps you in adding those 2 additional seconds to think. The little extra thinking can help you make the right decision.
2. Be prepared to explore options before deciding a price:
Anchoring bias is exploited in various businesses. Do not go with a mindset that you will buy on a price that seems the best to you based on the first few options. You must prepare yourself to logically arrive at the best price.
Look for the price of the cheapest and most expensive model. Evaluate the features and decide if the price justifies what it provides. With the smartphone in your pocket, finding the average price is only a few fingertips away.
3. Set a mental anchor before you receive the first information:
Before stepping into a store to buy a t-shirt, make a mental estimate of how much would you pay for it. Having an estimate prevents the first price from setting an anchor.
However, if you have no clue about the average price, your guess might end up way off not leading to any benefit.
4. Explore online:
Before you head to a store to buy a chandelier, look up online on what the average price of a chandelier is. If you know the average you will realize when the salesperson is forcing an anchor onto you.
5. Delay your decision:
When you are dealing with any unknown territory, tell yourself that you will come to a decision of an average price after exploring, say 5 options.
The anchoring effect is one of the most powerful mental flaws which influences your decision making without your knowledge. You will make some bad decisions due to the effect of anchors. You do not have to turn into a perfect decision-maker but have to try to avoid the bad influence anchors have on you. Be aware and be wise.
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What I am:
Continuously improving self-learner
Productivity/Time Management Obsessed