Although many know the concept of anchoring, only few will suspect the actual power that it has over human behaviour.
Anchoring is the bias to place excessive importance on the first piece of information received.
When you are on holiday and haggling about the price of a souvenir, the vendor will always start with a ridiculously high price.
Since you don’t have any other information about what a reasonable price is, your mind will accept the price as a useful starting point and start negotiating downwards.
Of course you can take control of the negotiation by first offering the vendor a ridiculously low price. This forces him to negotiate upwards instead.
After you buy the souvenir at a great discount, the vendor probably still makes good money, because he was able to anchor you at a high price point.
Restaurants, stocks and 30 year olds
Another famous tactic used by restaurants is showing one incredibly expensive main course or drink. Think Wagyu beef or 18 year old whiskey. It is not put on the menu to be bought – although that would of course be nice – but to seduce you to buy another expensive item on the menu that suddenly looks reasonable compared with the extremely expensive item.
In the stock market, your evaluation of whether the market is doing good or bad will depend on the time scale chosen: does it show the stock market’s performance over the last hour, day, week, month, year or decade? Your evaluation of the current stock market will change, as the timescale changes.
Anchoring works because the human mind is bad at guessing and evaluating something in a vacuum. It needs to have a point of reference to begin comparing.
Is 30 years old or young? Next to a baby it seems old, but next to a senior citizen, it suddenly looks young. As soon as we have that data point – even if it is given to us by the party we are negotiating against, our mind has no choice, but to use it.
False anchors
In fact, our mind needs another data point so badly, that it uses it, even if it is obviously false.
In one experiment, students were asked to write down the last two digits of their phone number. Then, they were asked to estimate the number of countries in Africa.
Though the two questions are totally unrelated, the student’s estimate of the number of countries in Africa was heavily influenced by the last two digits of their phone number. When students’ last two digits had a low number (for example 12’), their estimate of the number of countries in Africa was much lower, than when their last two digits had a high number (for example “85”).
The best guess of people at which age Mahatma Gandhi died was greatly influenced by the question they were asked just before.
Half of the people in the experiment were asked if Gandhi died before or after age nine, while the other half were asked whether he died before or after the age of 140.
The first group guessed 50, while the second group guessed 67. That is 17 years difference, based on the anchor question!
Note that the anchor question gave no plausible information at all, it contained no useful clue. The oldest person ever alive lived “only” 122 years, while Gandhi obviously was older than nine to become a politician.
Even professionals get anchored
The above examples show that avoiding anchoring is extremely hard, even if people are made explicitly aware of it and know the anchor to be nonsense.
Even professionals that estimate the whole day, such as real estate agents, are susceptible to anchoring.
When real estate agents were asked to estimate the “true value” of a house and were given information about the house to base their decision on, it included a “listing price”.
Although the agents denied that their estimate was influenced by the listing price, research showed that agents’ estimate for the exact same house varied, based on the listing prices they received.
Tactics
There are two anchoring tactics you can employ in any negotiation, for example about your salary with a new employer.
The first is to let your new employer make the first offer. You may be surprised about his offer as there could be a gap between what you think you are worth and what he thinks.
Of course, if he tries to anchor you with a low amount, you need to anchor him with a counterproposal.
Make sure you have thought about the counterproposal before the negotiation, to prevent you becoming anchored by his opening offer!
The second tactic is to anchor your new employer by mentioning a salary first. Either you will successfully anchor him, or he will try to counter anchor you!
To avoid being anchored:
Realise you are being anchored whenever you receive the first piece of information
Accept that avoiding anchoring is something that even professionals have trouble with
Think about value / price before you receive information from your counter party
If you are being anchored, swing the other way of the price spectrum with a counter anchor and realise that research shows that people typically do not swing far enough away from the anchor.
Mark Reijman is co-founder and managing director of http://www.comparehero.my/, dedicated to increasing financial literacy and help you save time and money by comparing all credit cards, loans and broadband plans in Malaysia.
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