Imagine a scenario, You want to buy an item, but you don’t have much idea that how much does that item will cost you. You went to the nearby store, and the salesman shows you the item, and it costs 1000 dollars. You think it is more than your budget, and you ask for more options. The salesman shows you more options but that is also in the same range as he showed you first. You ask for the item in the lower range, and then the salesman brings you a similar item and says that this item is at a 50% discount today. You get excited and compare it with the price range of the first item the salesman showed to you. You think it’s a great deal and buy that item at half the price of the item that you checked first, i.e., at 500 dollars. You are happy with your purchase but little did you know that the same item costs you around 300 dollars in another nearby store. Well, how you find this purchase at a higher price a good deal, the answer is the Anchoring Effect. In this article, we’ll learn about the Anchoring effect, the reason behind this effect, and some real-life examples of the anchoring effect.
What is Anchoring Effect?
The tendency of our brain to focus on the information that we encounter first is known as the Anchoring effect or Anchoring Bias. We tend to compare or estimate all the information that we encounter later with the first piece of information (anchor) that we encounter. The anchoring effect comes into play in the decision-making process where we tend to focus too much on the first piece of information (anchor) or the previously stored information in our memory. For example, you have seen a shirt that costs $ 500, you liked the shirt but thinks it is costly, then you see another shirt that costs $100. Now, due to the anchoring effect, you tend to compare the price of this second shirt with the first shirt, and you are more likely to buy this shirt as you think it is at a cheaper price. Although the quality of this shirt is lower than the one you first saw, you are more likely to take your decision based on the price of the first shirt.
The anchoring effect was formulated by Amos Tversky and Daniel Kahneman (Noble prize winner) through the various studies conducted by them in 1974. In one of their publications ‘Judgment under Uncertainty: Heuristics and Biases,’ they conducted a study on high school children. They divided the children into two groups, the first group had to solve the following calculation,
1 × 2 × 3 × 4 × 5 × 6 × 7 × 8
The second group had to solve the same series, but it was given in the reverse order, i.e.,
8× 7 × 6 × 5 × 4 × 3 × 2 × 1
The participants were told to solve the problem in just 5 seconds. As they were provided with a very limited time, the participants did just the first few calculations and then estimated the answer based on the initial calculation, i.e., they made use of an anchor to find the estimated answer. According to the results of the experiment, the first group estimated (median estimate) 512 to be the answer, and the second group estimated (median estimate) 2,250 be the answer, while the right answer is 40,320. The large difference in the estimation of the first group and the second group is due to the anchor effect. The first group estimated a smaller value (512) as they were presented with the series that initiates from the smaller digits, while the second group estimated a larger value (2,2,50) as they were presented with the series that started from the larger digits.
In another experiment conducted by Amon Tversky, the subjects were told to spin the ‘wheel of fortune.’ Then, the participants have to note down the number that comes on the wheel. After this, the participants were asked to name the total number of member states in the United Nation. It was found that the participant who got the large number on the spinning wheel of fortune guessed the larger number of members in the United Nations than those who got the lower number.
Real-life Examples of Anchoring Effect
An anchor is used in almost every store to boost sales. Have you ever noticed that the most expensive items are presented on the front of the store? The 300 dollars shirt that you see first makes the 100 dollars shirt that you see later seem cheaper. Many luxury brands use similar strategies to optimize their sales. You must have seen that the marketer generally use the prices of the items ending with the nine such as 9.99 dollar instead of 10 dollars. Due to these price tags the $9 anchor in the consumer’s mind instead of $10. In a study, it was found that this trick leads to an average of 24% increase in sales.
2. Purchase Quantity Limit
You must have seen the signs such as ‘Limit 10 per Customer’ in the shopping malls, most of us think that it must be used to save that high-in-demand product from getting wiped out from the store, but it is used for an entirely different purpose. A study was conducted by the researchers, Brian Wansink, Robert J. Kent, Stephen J. Hoch to check the impact of the setting ‘purchase quantity limit’ on the sales of the product. They placed a sign of ‘Limit of 12 per person’ on the 0.79 dollars per can of Cambell’s soup. It was found that the sales of the cans increases significantly when the sign of the purchases limit was displayed along with the product. The customers bought 3.3 cans of soup on average when there was no purchase limit, but the number jumps to the 7 cans of soups on average when the limit of 12 per customer was displayed. This is again related to the anchor effect, where the number 12 served as an anchor to the customers.
3. Sale Negotiation
Suppose you want to buy a car and you visit a car showroom. You liked a car that costs 40,000 dollars. You bargain with the salesman and after a long discussion, the salesman agrees to the price of 33,000 dollars. You are thankful to the salesman and find it a good deal. You have no idea that the salesman wanted to sell you the car for around 32,000 dollars, right from the moment you entered the store. Due to the anchoring effect, any price lower than the initial price seems like a good deal.
Remember you always wait for the days when the big e-commerce websites announce the sale. You get excited when you see the tags like a 50 per cent discount on the original price say 119 $. Have you ever wondered why they put the original price on the tags? Well, the reason behind this is of course the anchoring effect. When you look at the original price of the item, you compare the discounted price with the original price that makes you feel that you are getting a good deal and you end up buying that item. The e-commerce websites often increase the original price of the items during the sales so that it seems more attractive to the customers that they are saving a good amount of money after buying that particular item.
5. Multiple Unit Pricing
An experiment was conducted by psychologists Stephen Hoch, Robert Kent, and Brian Wansink to study the impact of multiple-unit pricing on the sales of the product. For example, two different taglines, i.e., “On sale, o.50 dollars per toilet roll” and “On sale, 4 toilet rolls for 2 dollars” were used in the two different sales. Although the price per item in both the sales is the same, it was found that the sales of the multiple-unit pricing, i.e., “On sale, 4 toilet rolls for 2 dollars” was 40% higher than the single unit pricing. This happened because the number 4 in the multiple unit pricing acted as an anchor for the customers.
An Israeli-American professor, Dan Ariely showed the concept of anchoring effect in bidding too. He asked the participants to think of the last two digits of their passcodes, and then he told participants to bid on the given items. It was found that the participants with higher last two digits of passcodes bid higher in the bidding while those with the lower passcodes digits left the bidding earlier.
7. Negotiating Salary
Suppose you have cleared all the rounds of an interview, and you are hopping for the pay scale of 80,000 dollars. However, the recruiter states the salary as 50,000 dollars. Now, you can’t straightaway ask for a raise from 50,000 dollars to 80,000 dollars. You may now ask for 70,000 dollars instead of 80,000 dollars as the recruiter has set the anchor of the 50,000 dollars. The first offer made by the recruiter or the candidate becomes the reference point or the anchor for the rest of the salary discussion.
8. Estimations or Guesses
The anchoring effect helps us to make the calculated guess and arrive at the conclusions. For example, you are attempting a test, and you encounter a question about the year of Hiroshima and Nagasaki Bombing. Suppose you don’t know the exact answer, so you try to focus on the previously stored information in your memory. You will think about the familiar situations with this event say timeline of the second world war. You may not be sure but you can approximate that it happens around 1935-1945. If you remember your history lessons you may know that the second world war ended after the Hiroshima and Nagasaki bombing. Thus you can approximate the right answer, i.e., 1945. In this way, you can arrive at the conclusions with the help of various anchors (previously-stored information). However, the drawback of this is that our brain uses the anchors even when we don’t need to, due to the anchoring effect. In a study, the participants were asked to write the last two digits of their phone numbers and then they were asked the year in which Attila the Hun got defeated. Surprisingly, it was found that the people whose last two digits of their mobile numbers were higher said the later years as the year in which the Attila the Hun defeated.
An advertisement was published in an economist magazine in which three subscription options were given as follows,
Option 1: Web-only for 59 dollars
Option 2: The Print-only for 125 dollars
Option 3: Both Web and Print for 125 dollars
You might think that these are stupid options as the price for print only and both the web and print only options are the same. Well, this is not stupidity, the trick here is the Anchoring Effect. As expected, no one choose the second option i.e., print only, and most of the people opted for the third option, i.e., the web and print options. The interesting thing that was found was that when the third option (web and print option) was removed, most of the people opted for the web-only option. The people first choose the print and web option because the print only option was added to serve as an anchor, which makes the customers feel that the web and print option is the best choice.
10. Anchoring Effect in Judgement
A study was conducted on the criminal judges to analyse ṭhe impact of anchoring effect on them. In this study, the judges were provided with the hypothetical cases to assign the prison sentence, they were also provided with the prison sentences that the prosecutors have demanded. The judges had to rate the prosecutor’s decisions that whether the prison that the prosecutor has demanded is accurate, low, or too high, and after rating, they had to give their judgement (prison sentence), which they think would be accurate. As expected, the judges too fell victim to the anchoring effect, the judges who were provided with the higher anchor (longer prison sentence by the prosecutor) gave the higher prison sentence of 28.7 months on average, and those who were provided with the lower anchor gave the lower prison sentence of 18.78 months on average. This study revealed that the anchor effect is so significant that it can change even the judge’s perception of the cases.
11. Real Estate
The anchor effect tactic is used by most real estate agents. When you approach a real estate agent for buying or renting a house, they never show the best properties first, in fact, the first few properties they show are generally of low standards with various flaws. The rent that the real state agents set for the low standard price are generally high. For example, the agent showed you a house with bad conditions that cost 4000 dollars. The trick here is that the real estate agent never wanted to sell you that house, what he wanted to do was to set an anchor. The low standard house and its high price serve as an anchor and you will think that you are not gonna get a good house in this price range so you mentally think of increasing your budget. Due to this anchor, the other house that seems good and costs 5000 dollars may seem you a better option. If the real estate agent had shown you this house at the beginning then you might has had considered it overpriced.
12. Organizational Behavior
In organizations, the performance of the topmost employees serves as the anchor to other employees. The employees that are hungry for growth try to push their limits and surpass the level set by the topmost employee. The higher the performance and the skill level of the topmost employee, the higher will be the overall level of the other employees. On the contrary, if the best employee of the company is not that skilled, the other employees may also lag.
13. Anchoring Effect Trick
The anchoring effect can trick you to think that you are a smart buyer, and you are saving money by buying any specific item. For example, consider the gas prices to be 1.85 dollars per gallon in around 2006. These prices kept on increasing slowly, but the increasing price was under 2 dollars. The gas price then reached nearly 3 dollars per gallon, this made the consumers worried, and they were hesitant to pay as the 2 dollars anchored in the consumer’s mind. Afterwards when the consumer’s reset their anchor to a high point, i.e., 3 dollars the prices dropped to 2.50 dollars per gallon. Eventually, the price that seemed higher earlier when the anchor of 2 dollars was set in the consumer’s minds, now seems lesser due to the ‘new anchor,’ i.e., three dollars. This trick is often used in businesses to boost the sales of goods or services.
14. Influence of Anchor Effect on Experts
To test the impact of the Anchor effect on the experts and the amateurs, an experiment was conducted on a group of real state agents and the students. They were shown a piece of property and they had to estimate the value of that property. Well, they were also told that the property shown to them is listed on a newspaper advertisement at the cost X (X is a randomly generated price). Following the Anchor effect, when the students were asked for the property’s price they told the price nearby the cost X. What was surprising was that not only students but the professional real estate agents also fell victim to the Anchor effect. They performed quite better than the students but not that significantly. This shows that you can still fall for the Anchor effect even though you are an expert.
Factors that Influence the Anchoring Effect
The influence of cognitive abilities on the anchor effect is complex to explain. Some studies proved that although the anchoring effect does not completely disappear in the people with greater cognitive abilities, they tend to fall lesser for the anchoring effect than those with the average cognitive abilities. However, some other studies show that there is not much significant influence of cognitive abilities on the anchoring effect.
Some earlier experiments showed that if a person is sad or depressed, then he/she is more likely to evaluate the problems accurately. Based on these studies, the recent studies were conducted on the hypothesis that people with sad or depressed moods are less likely to fall, a victim of the anchoring effect than the people with happier moods. The results however were entirely different, it was found that the people with happier moods were less likely to fall for the anchoring effect than those with the sad or the depressed mood.
Some studies have shown that people with more experience, knowledge or expertise in any given field are less likely to get affected by the anchor effect, but that does not mean that they are not susceptible, as discussed above in the examples of ‘criminal court’s judgments and the professional real estate agents case. This shows that it does not matter you are a professional or not, you are equally susceptible to getting affected by the anchoring effect.
Some researchers were conducted to find the relation between the personality of the person and his/her likeliness to fall the victim to the anchoring effect. People who have the personality traits like conscientiousness and agreeableness are more susceptible to the anchoring effect, while those who have high extraversion traits are less prone to be affected by the anchoring effect. Another study shows that the people who are open to new changes and experiences are more likely to fall victim to the anchor effect.
Ways To Avoid the Anchoring Effect
One can not stop his/her mind from getting affected by the anchor effect because the information that one encounter first always remains in his/her mind whether in buying a small item or taking large decisions. It’s difficult to stop the anchoring effect from triggering our thoughts but by using the following techniques, one can reduce the impact of the anchor on his/her decisions.
The first step of avoiding the anchoring bias is to be aware of it. Before making any decision or buying any item always make sure that you are aware of the anchor that is involved in that situation. If you understand the way your brain makes judgments, and are aware of your responses or vulnerability in the sales negotiating, you are less likely to be the victim of the anchoring effect.
Explore More Options
The anchoring effect is widely used in various businesses to improve sales. The customers immediately get excited to see the 50 per cent discount on an item and end up buying it. They don’t even realize that the item they are buying is not even worth paying half of its price or the same item is available at a much lower price at a different store. We should use our logic to analyse the item’s price instead of just getting excited by looking at the discount tags on that item.
Set Your Own Anchor
One can use the tactics of the Anchor effect for his/her own benefit also. For example, if you are thinking of buying a second-hand car, then it is always better to do your own research first and find the average selling price of that car before visiting the agent to check the available options. The average price estimated by you will act as an anchor that guides you throughout the selling negotiation and prevent you from falling into the trap of the anchor set by the salesperson.
In today’s age of digitization, one can easily check the price of any item online. We need not go anywhere and can simply compare among hundreds of options on our mobiles or laptops.
Delay Your Decisions
It is always better to take a good amount of time before making any decision. During the sales negotiation or any other negotiations, people tend to get affected by the anchoring effect that leads them to make the decisions that they will regret later. A significant amount of time before making the decisions allows the person to analyse his/her thoughts and evaluate the anchor (if any) used in the negotiation.