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
- 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).
- 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.
- Think carefully about how you structure your product range and prices. People will anchor whether you intend for them to do so, or not.
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- Aspirational membership schemes and belonging The category size bias provides a credible explanation for why we human beings tend to associate with large groups that are viewed favourably by society. Being part of a large and “desirable” social group can make others believe that we also possess the many qualities of its members. For small businesses, it suggests that forming or being a part of a consortium or large and high quality networking group can dramatically elevate your brand image.
- Communicating category sizes to nudge effectively Highlighting the differences between the large and small categories is highly likely to enhance the effect of the Category Size Bias. For instance, for software companies, stating that there are 10 features in the premium version versus 4 in the free version will help nudge a decision towards the premium version
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- The findings from this braingem can nudge better healthcare choices, encourage consumption of a given product, and lead to more confident consumer decisions.
- We mistakenly believe that items in larger categories have a higher probability of being picked than ones in smaller categories, despite all items having an equal chance of being picked.
- We’ll spend or gamble more money on items put in larger categories.
- We’re more likely to take action from tasks when they’re in a bigger list, over a smaller list.
- We once we put something into a group, we perceive it to adopt all the characteristics of that group. This suggests that small companies should foster alliances with similarly-principled, more established companies.
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