A3 Life Design

View Original

The anchoring effect: The power of initial values

We tend to make estimates that stay close to the first proposed value.

Answer the following two questions (without looking up information):

๐Ÿค” Is the percentage of African nations among United Nations members larger or smaller than 65?

๐Ÿค” What is your best guess of the percentage of African nations in the United Nations?

 

Write down your answers to the questions before reading on.

 

The anchoring effect is our tendency to make estimates that are biased toward the initially proposed value (the anchor). This initial value can cause us to make estimates that stay close to this value (hence the anchor metaphor), even if the initial value is arbitrary or unrelated to the decision at hand.

 

In a classic study by Tversky and Kahneman, they rigged a wheel of fortune in such a way that it only stopped at number 10 or 65. After spinning the wheel, each participant wrote down the number at which the wheel stopped (i.e. 10 or 65) and then answered two questions:

๐Ÿค” Is the percentage of African nations among United Nations members larger or smaller than the number you just wrote?

๐Ÿค” What is your best guess of the percentage of African nations in the United Nations?

 

Of course, the participants should have ignored the number they wrote down, because it is just a random number. But they didnโ€™t. The average estimate for those who wrote 10 was 25%, and for those who wrote 65 it was 45%.

 

You were given number 65. Is the percentage you wrote down around 40% or higher? Then you probably used 65 as anchor.

 

An important finding of the anchoring research is that anchors that are meaningless, such as the outcome of the manipulated wheel of fortune or of a pair of loaded dice, can be just as effective as anchors that are informative. The anchoring effect makes us much more susceptible to suggestion than we would like. Our thoughts and behaviour are influenced, much more than we know or want, by the environment of the moment.

 

Examples of the anchoring effect

The anchoring effect can be observed in many real-life situations. Here are some examples.

 

๐Ÿ‘‰ Companies can limit the number of items customers can purchase to influence consumer behaviour, for example โ€˜Maximum 5 per customerโ€™ or โ€˜Maximum 6 types of cheese per burgerโ€™. This limit acts as an anchor. Customers then tend to buy more than they originally intended because their minds are now anchored on a higher number than usual. Rationing also plays a role here, because a limit suggests that goods are scarce.

 

๐Ÿ‘‰ Companies may offer expensive premium products even though the majority of customers buy their less expensive products. The presence of these premium items acts as an anchor. They make the non-premium items appear much cheaper and better value for money. Some examples: restaurants that put a few expensive dishes on their menus, car manufacturers that showcase high-end luxury models in their showrooms, and technology companies that market expensive flagship products. 

 

๐Ÿ‘‰ Retailers often display the original price, or a greatly increased price, alongside the discounted price. Shoppers tend to view the discounted price as a better deal because it's anchored to the higher price.

 

๐Ÿ‘‰ When you buy a home, what you are willing to pay for the home is influenced by the initial asking price, even if that price is above the property's real market value. The higher the asking price, the more valuable the home appears to be, even if you are determined to resist the influence of the initial asking price. The same mechanism applies when buying a used car. In negotiations where price is the main issue to be settled, the seller has the advantage of setting the initial asking price, which can have a powerful effect on the outcome.

 

๐Ÿ‘‰ In a job interview, the employer might mention a salary figure early in the conversation. Job applicants may then tend to base their salary expectations on that initial number, even if it is lower than what they originally envisioned.

 

The psychology of the anchoring effect

There are two different mechanisms that produce anchoring effects (see Kahneman - Thinking, Fast and Slow).

 

The first mechanism occurs in a deliberate adjustment process. People start from the anchor, judge whether it is too high or too low and gradually adjust their estimate. Usually the adjustment ends prematurely, because people stop when they are no longer sure whether they should continue. This explains why you're probably driving too fast when you enter a city from the highway.

 

The second mechanism occurs through a priming effect: our minds understand sentences by trying to make them true by selective activation of compatible memories. Every prime tends to recall information that is compatible with it. Our minds try their best to construct a story in which the anchor (the prime) is the true number or reference point. Different anchors activate different sets of ideas in memory, leading to different estimates.

 

Measuring the anchoring effect

The anchoring effect can be measured by calculating the anchoring index: divide the difference between the two average estimates by the difference between the two anchors. In the example at the beginning of this blog post, the difference between the average estimates is 45 โ€“ 25 = 20. The difference between the completely meaningless anchors is 65 โ€“ 10 = 55. The anchor index in this example is therefore 20/55 = 36%.

 

The anchoring effect would be 100% if all participants adopt the anchor as their estimate, and zero if all participants ignored the anchor. A value of 55% has been observed in numerous experiments.

 

How to reduce the impact of the anchoring effect

Protecting yourself from the negative consequences of biases can be tiresome, but it can be worth it when the stakes are high.

 

โš’๏ธ Become aware of the anchoring effect

Becoming aware of the potential influence of the anchoring effect is the first step in mitigating its impact.

 

When you make an important decision, take a step back to examine whether the anchoring effect could influence the decision. Ask yourself questions such as:

๐Ÿค” Am I basing this decision on an initially proposed value? The anchor can be a price, a proposed solution, or a reference point.

๐Ÿค” Is the anchor relevant to the decision? Sometimes the anchor is random or unrelated.

๐Ÿค” Where did the anchor come from? Reflect on how the anchor was established.

๐Ÿค” Is the anchor based on data or evidence of sufficient quality and reliability?

๐Ÿค” Would I make a different decision without the anchor? Try to imagine the decision without the influence of the anchor.

 

If you become aware that the anchoring effect may be playing a role, break away from the anchor.

 

โš’๏ธ Break away from the anchor

Break away from the anchor by gathering additional information and obtaining multiple perspectives.

 

๐Ÿ‘‰ To counteract the priming effect of the anchor (recalling information from memory that is compatible with it), you must deliberately search your memory for arguments against the anchor.

 

๐Ÿ‘‰ Conduct independent research to gather objective information and obtain multiple perspectives from reliable sources, rather than relying solely on the anchor. This can reduce the impact of the anchor and help you make a more informed decision.

 

๐Ÿ‘‰ Ask for input from others who are not affected by the anchor. For example, gather opinions from colleagues or interview experts who can inform you about the relevance of the anchor. Explaining the situation to others forces you to clarify your reasoning, and othersโ€™ perspectives can provide different anchors and reference points.

 

๐Ÿ‘‰ Give yourself some time before making a decision. Taking the time to consider other factors and information can help you break free from the anchorโ€™s influence.  

 

๐Ÿ‘‰ Use mindfulness techniques to reduce the influence of the anchoring effect. For example, when you notice your mind clinging to thoughts about the anchor, take a few deep, slow breaths and focus your attention completely on your breathing, observing each inhale and exhale. This helps you connect to the present moment and prevents fixation on the anchor.

 

๐ŸŽ‰๐Ÿ‘๐ŸŽˆ

 

The phenomenon of anchoring shows that even though we consider ourselves rational and logical beings, external details can have an outsized influence on our decisions. To avoid falling victim to anchoring, especially when making important decisions, be aware of its potential influence and try to escape its pull.

References

Thinking, Fast and Slow, by Daniel Kahneman

 

5 Common Mental Errors That Sway You From Making Good Decisions, by James Clear,  https://jamesclear.com/common-mental-errors

 

Donโ€™t Let Anchoring Bias Weigh Down Your Judgment, Harvard Business Review, by Helen Lee Bouygues, https://hbr.org/2022/08/dont-let-anchoring-bias-weigh-down-your-judgment

My blogposts about biases and heuristics are available here:

https://www.a3lifedesign.com/blog-english/category/Biases

Topics & Contact