Anchoring Bias

We tend to rely too heavily on the first piece of information seen

Anchoring Bias

We tend to rely too heavily on the first piece of information seen

Setting a high price for one item makes all others seem cheaper, though only when the price shown is actually plausible (and not some silly amount!)

Sugden, R; Zheng, J & Zizzo, D (2013) Not all anchors are created equal. Journal of Economic Psychology 39 (2013) 21-31

During decision making, anchoring occurs when individuals use an initial piece of information to make subsequent judgments. Once an anchor is set, other judgements are made by adjusting away from that anchor, and there is a bias toward interpreting other information around the anchor.

For example, the initial price offered for a used car sets the standard for the rest of the negotiations, so that prices lower than the initial price seem more reasonable even if they are still higher than what the car is really worth.

Studies have shown that anchoring is very difficult to avoid. For example, in one study students were given anchors that were obviously wrong. They were asked whether Mahatma Gandhi died before or after age 9, or before or after age 140. Clearly neither of these anchors are correct, but the two groups still guessed significantly differently (choosing an average age of 50 vs. an average age of 67).

Takeaways for Decision-Makers

  1. If you are to use anchors, be aware of your target audience. Anchoring effects are weaker for individuals with higher cognitive ability (Bergman et al., 2010) and those with experience buying the product you’re selling (Alevy et al., 2011).
  2. Don’t set your anchor price too high, or the natural inclination to anchor other choices against this product will greatly diminish. Keep it realistic and relatively in the realm of what else you’re selling, basically.
  3. Think carefully about how you structure your product range and prices. People will anchor whether you intend for them to do so, or not.

Further Reading

Judgment under Uncertainty: Heuristics and Biases PDF (Tversky & Kahneman, 1974)

Explaining the enigmatic anchoring effect: Mechanisms of selective accessibility PDF (Strack & Mussweiler, 1997)

A New Look at Anchoring Effects: Basic Anchoring and Its Antecedents PDF (Wilson, Houston & Etling, 1996)

Anchoring Effects: Evidence from Art Auctions PDF (Beggs & Graddy, 2009)

Not all anchors are created equal (Sugden, Zheng & Zizzo, 2013)

Field experiments on anchoring of economic valuations (Alvey, Landry & List, 2010)

Anchoring and cognitive ability (Bergman et al., 2009)

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