Welcome back to our series on cognitive biases! We’ve already explored how confirmation bias can make us seek out agreeable information and how the availability heuristic can lead us to judge probabilities based on what’s easily recalled. Today, we’re diving into a bias that has a significant impact on our decisions, especially when it comes to numbers and prices: the Anchoring Effect.

Have you ever walked into a store and seen an item marked down from a significantly higher original price? Did that discount seem more appealing than if the item was just priced at the sale price from the start? If so, you’ve likely experienced the power of the anchoring effect.

What Exactly Is the Anchoring Effect?

The anchoring effect describes our tendency to rely too heavily on the first piece of information offered (the “anchor”) when making decisions. This initial anchor can have a powerful influence on our subsequent judgments and estimations, even if the anchor itself is arbitrary or irrelevant. Once an anchor is set, we tend to adjust away from it, but often insufficiently, leading our final estimate to be biased towards the initial anchor.

Anchors Away: Real-World Examples

The anchoring effect is pervasive in various aspects of our lives:

• Pricing and Sales: As mentioned earlier, retailers frequently use original (often inflated) prices as anchors to make sale prices seem like a better deal. Even if the “sale” price is still higher than what the item is truly worth or what competitors are charging, the initial high anchor influences our perception of value.
• Negotiations: In salary negotiations or when buying a car, the first offer made often serves as the anchor. Even if you try to negotiate, your final agreement will likely be influenced by that initial number.
• Real Estate: The initial listing price of a house can act as a strong anchor, influencing how buyers perceive its value, even after considering factors like condition and location.
• Auctions: The starting bid in an auction can significantly influence the final selling price. Even if the initial bid is low, it sets a reference point that subsequent bids tend to gravitate around.
• Estimations: If you’re asked to estimate a quantity (e.g., the number of jelly beans in a jar) after being given an initial, potentially random number, your estimate will likely be biased towards that initial number.

Why Anchors Hold So Firmly

The anchoring effect is thought to occur due to a couple of key reasons:

• Insufficient Adjustment: Once an anchor is presented, we tend to adjust our estimate away from it. However, this adjustment is often insufficient, meaning our final estimate remains too close to the initial anchor.
• Selective Accessibility: The initial anchor might bring to mind information that is consistent with it, making it seem more relevant or plausible, even if it isn’t.

Breaking the Chain: Tips to Mitigate the Anchoring Effect

While anchors can be powerful, we can take steps to lessen their influence:

• Be Aware of Anchors: Recognizing that the first piece of information can bias your judgment is the first step.
• Do Your Own Research: Before engaging in negotiations or making purchasing decisions, gather independent information to establish your own sense of value. Don’t rely solely on the information provided by the other party.
• Consider a Range of Values: Instead of focusing on a single anchor, think about a range of possible values or prices. This can help you avoid being overly influenced by one specific number.
• Make Counter-Offers Boldly: In negotiations, don’t be afraid to make counter-offers that significantly deviate from the initial anchor if you believe it’s unreasonable.
• Focus on Objective Criteria: Try to base your decisions on objective factors and data rather than being swayed by the initial anchor. For example, when buying a car, focus on the car’s condition, features, and market value, rather than just the sticker price.
• Seek Multiple Opinions: When making estimations or decisions, consult with others who may have different reference points and can offer unbiased perspectives.

By understanding the anchoring effect and actively employing these strategies, we can make more rational decisions and avoid being unduly swayed by initial, potentially arbitrary, pieces of information.

Read an overview of cognitives biases, and find all the articles on cognitive biases.