Don’t Make the First Offer: Anchoring
Episode #2 of the course How cognitive biases are messing up your decisions by Abasi Latcham
Today, we’re going to discuss the bias known as anchoring.
What Is It?
Anchoring is the effect whereby people place undue importance on the first piece of information they hear, even if that piece of information is completely arbitrary. If you were ever told to make a good first impression, that’s because we all have at least some appreciation of the strength of anchoring. However, this bias goes far beyond first impressions, reaching deep into the realms of commerce, negotiation, and basically anything involving numbers.
Anchoring is related to confirmation bias, the tendency to prefer information that confirms your existing knowledge and beliefs. Researchers think that it works like this: When you don’t know the answer to some question, your brain latches onto the first bit of information it hears and makes it a reference point, a “starting point for adjustment” against which all future information is assessed. Subconsciously, your brain seeks to satisfy its confirmation bias, so its future thoughts are pegged to this bit of new information.
Anchoring happens all the time, especially in the world of commerce.
• Random numbers: Studies have shown that random numbers can act as anchors. For example, Tversky and Kahneman spun a roulette wheel containing the numbers 0 to 100 in front of subjects. After it stopped, the subjects were asked to estimate the percentage of African countries in the United Nations. The higher the number at which the wheel stopped, the higher the percentage estimated by the subjects.
• Recommended prices: Keeping the recommended or pre-sale price on a tag anchors us to the higher price, so the deal looks more attractive compared to if just the lower price was displayed.
• Negotiations: You know the adage, “Don’t make the first offer”? That’s because it has been shown to act as an anchor and influence the course of negotiations. Much like the roulette wheel example above, the higher an initial offer during a negotiation, the higher the final agreement.
• Door-in-the-face: The door-in-the-face technique is used in marketing. It’s asking for something outrageous with the intention of being denied, and then following up with the actual request, which by virtue of the recipient’s anchor to the original request, seems much more reasonable and thus more likely to be fulfilled.
Even once we are aware of nudges like anchoring, we aren’t great at countering their influence. And anchoring is an especially tricky one because it works in such surreptitious ways. Your best bet is to remind yourself that you are prone to anchoring and be suspicious of any obviously inflated prices and any subsequent “deals.”
We’ll end with a quote from Dan Ariely in Predictably Irrational:
“Pay particular attention to the first decision we make in what is going to be a long stream of decisions (about clothing, food, etc.). When we face such a decision, it might seem to us that this is just one decision, without large consequences; but in fact the power of the first decision can have such a long-lasting effect that it will percolate into our future decision for years to come. Given this effect, the first decision is crucial, and we should give it an appropriate amount of attention.”
Tomorrow, we will lay the foundations for several biases by covering prospect theory.
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