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The Anchoring Bias…
… occurs when a person is influenced unconsciously by the initial piece of information (considered to be the Anchor), which in turn affects their final decision.
Anchoring Bias – Example in Real Life
You move to a new city and are searching for a place to stay. Whilst driving, a particular neighborhood catches your attention. The location is attractive, moreover -you spot an adjacent park and a grocery store on the other side.
All the more convenient!
You notice two houses that are up for rent, both of them similar in size.
So you speak to one of the real estate agent’s, whose company is managing the property and realize that the rent will set you back $1500 a month.
With this in mind, you drive a few blocks down the road where the other house is located, and after a brief conversation over the phone, you find out that the rent for this property is $1200 a month excluding utilities…
“That seems like a fair amount,” you think to yourself: “and it’s $300 less than the other property!”
And so without hesitation, you call the real estate agent you just spoke with and book an appointment for a tour of the house the following day.
Here’s how you were affected by the anchoring bias:
You didn’t have an estimate of how much the rents would be for properties in this area. As a result, the initial value of $1500 acted as an anchor, that is – it became the psychological benchmark through which you compared the rent for the second property and which also influenced you to conclude that $1200 was a ‘fair amount.’
Below are two more anchoring bias examples.
Anchoring Bias in Marketing
You are out shopping for leather boots and a particular pair catches your attention.
You look at the price tag, the boots cost $130.
As you inspect the tag further, you notice on the other side that it has a 40% discount! Now this reduced sales price from $130 to $78 seems like a bargain!
Unbeknownst to you, this is one of the oldest tricks used by marketers.
Without prior knowledge on how much a pair of leather boots cost, the initial price of $130 acted as an anchor which influenced you to perceive that by purchasing the boots at the reduced price of $78, you were saving $52.
On the other hand, for the seller -the discounted price of $78 was actually the amount they intended to sell the product at. They purposefully inflated the price to an arbitrary number which would then influence its customers to believe that they were getting a bargain.
Anchoring in Business, to Influence Customers
Psychologist Robert Levine gave an example once, of how a cable provider leveraged anchoring to influence their customers. The goal of the company was to raise prices on its monthly subscription without losing subscribers whilst also making it appear that they were better off.
Initially, there was a rumor going around that the new monthly rates were going up by $10. But later, in the company’s website, they denounced the rumor and added that their subscribers should relax as ‘basic cable rates are only increasing by $2 a month!’
As a result, their subscribers who were already anchored on $10, did not view the $2 increment nearly as catastrophic!
Some of them rationalized:
“A $2 increase isn’t so bad, let’s not forget it was supposed to go up by 10!”
Can A Judge’s Decision Be Influenced by the Roll of a Dice?
Behavioral Economist Daniel Kahneman, demonstrated how seemingly unrelated information can act as anchors that influence decision making. Out of the many experiments that he conducted, one of them stood out amongst the rest. Here are the details:
Several judges with more than 15 years of experience on the bench were first asked to read a case about a woman who had been caught stealing. They were then asked to roll a dice (rigged to land on a 3 or 9) and as soon as the dice landed –the judges were asked the following:
1. Would they sentence the woman to a term greater to or less than the number on the dice?
2. To specify the exact prison sentence (in months) that the woman would be subject to.
The results were surprising, to say the least…
The judges whose dice landed on a 3, sentenced her to 5 months on average, whereas the judges who rolled a 9, assigned an average sentence of 8 months.
The anchoring effect was 50%.
2 Ways to Counteract The Anchoring Bias:
- Avoid hunches, consider doing some research first.
Don’t invest in a company’s stock options just because you like them or get a ‘positive vibe.’ Instead, look at what industry their operating in and its trends. In addition, you should also consider viewing their financial statements and how well their competitors are performing in the market.
- Make the first bid and set it high!
When negotiating, decide on what amount you would be satisfied with. Then, raise it substantially and make the initial bid on that amount. Remember, that the initial number set forth will act as the anchor for the negotiations that follow.