Economics had always been a financial perspective of life for me, often about history and government policy that I learned in history class. But after I read Duke Professor Dan Ariely’s Predictably Irrational, economics seemed more applicable to my daily life, not only because of the micro-scale Ariely presented it on but also because of the psychological effects cited as the causes for our economic choices. See, while standard economic theory relies on the fact that all of our human decisions are rational, behavioral economics is much more realistic, instead acknowledging that morals, motivations, and personal biases often cause our decisions to be irrational (Witynski).
One of these biases outlined in behavioral economics is anchoring, “a psychological phenomenon in which people rely too heavily on the first piece of information (the anchor) they hear” (Fishman). First discovered by Israeli psychologists Amos Tversky and Daniel Kahneman 1968, the anchoring is a driven cognitive bias that affects us in our daily lives (Thaler and Sunstein). For example, you may see a computer at your local tech store on sale for $350, thinking that it is way too expensive. Then, as you walk into the next aisle, you see a different computer, which is now only $250. This is a great price, right? Well, not exactly. Even if they both look alike with 104 keys and a screen, these computers are far worse quality. But you, my friend, have gotten looped into the cynical cognitive trick of anchoring. The initial expensive computer acted as an anchor for your future judgment, therefore making you think that the next computer was a fantastic deal.
Even scarier than that, the anchoring phenomenon applies to us more than just financially. The fathers of our anchoring effect, Tversky and Kahneman, asked participants in their experiment to give their best guess on how many countries in Africa were part of the UN. However, before this, they had contestants spin a rigged wheel known as “The Wheel of Luck” with numbers from 0-65, always landing on numbers 10 or 65. This number functioned as an anchor, asking contestants whether the percentage of countries in Africa that were part of the UN was lower or higher. For those who landed on 10, the average guess was 25% (Kahneman and Tversky). For those who landed on 65, the average guess was 45% (Kahneman and Tversky). It is completely irrelevant information, but it still somehow affects our decisions.
From a personal level, we can easily be manipulated by others’ use of anchoring. For example, a salesperson may start by offering a high price for a product, knowing that the customer will likely negotiate down from that price. This can lead the customer to pay more for the product than they would have otherwise. But if you’re not a car salesperson, how can you use the anchoring effect to your advantage? Well, imagine you’re a tenant in a one-bedroom apartment in a mid-sized city. Your current rent is $1,200 per month. Your landlord tells you: “We’re proposing a rent increase of $200 per month, effective next month.” But you, my friend, have done your research. You’ve seen similar apartments in your area and find that the average rent for a one-bedroom is around $1,050. So you respond to your landlord: “I understand. However, I’ve been looking around and found similar apartments in the area renting for around $1,050 per month. I was hoping we could negotiate a smaller increase, perhaps around $50.” Bam. You haven’t necessarily decreased your rent, but you’re still saving $150 per month. So, the easiest way to counteract the anchoring effect is to reject the anchor. Whether you’re haggling over a price at a flea market, debating a contract with a client, or buying a house, it’s crucial to do your research to avoid falling victim to anchoring biases.
In fact, Carnegie Mellon Professor Gretchen Chapman, alongside Marketing Professor Eric Johnson at Columbia University, developed the consider the opposite strategy in the field of anchoring, a technique where the anchor victim considers why the anchor may be appropriate. Chapman and Johnson asked 234 University of Illinois Chicago students whether the last two digits of their social security number was higher or lower than the percent chance that a Republican would win the next election. Similar to Tversky and Kahneman’s experiment surrounding African countries in the UN, Chapman, and Johnson asked some students to think of reasons why the Republicans would win, while others were instructed to think of reasons why the Republicans would not win. Interestingly, those who thought of reasons why the Republican would not win had a weaker correlation (.20) than the moderately strong (.36) correlation between the anchoring effect and those who provided a reason consistent with the anchor (Chapman and Johnson). However, overall, the highest correlation with the anchoring effect was with those who were not asked to give a reason at all (.45) (Chapman and Johnson).
So, the next time you’re negotiating a salary, buying a car, or even ordering food, remember the power of the anchor. It’s a sneaky little trick that can influence our decisions without us even realizing it. By understanding how it works, we can take control and avoid being manipulated. After all, knowledge is power, and in the world of behavioral economics, knowledge can save you a pretty penny.
Works Cited
Chapman, Gretchen B., and Eric J. Johnson. “Anchoring, Activation, and the Construction of Values.” Organizational Behavior and Human Decision Processes, Academic Press, 25 May 2002, www.sciencedirect.com/science/article/abs/pii/S0749597899928418.
Fishman, Susan. “Anchoring Effect: What Is It?” Psych Central, Psych Central, 27 Sept. 2023, psychcentral.com/health/the-anchoring-effect-how-it-impacts-your-everyday-life#definition.
Kahneman, Daniel, and Amos Tversky. “Judgment under Uncertainty: Heuristics and Biases.” Science Adviser , 27 Sept. 1974, www.science.org/doi/10.1126/science.185.4157.1124.
Thaler, Richard, and Cass R. Sunstein. “The Two Friends Who Changed How We Think about How We Think.” The New Yorker, 7 Dec. 2016, www.newyorker.com/books/page-turner/the-two-friends-who-changed-how-we-think-about-how-we-think.
Witynski, Max. “Behavioral Economics, Explained.” University of Chicago News, news.uchicago.edu/explainer/what-is-behavioral-economics. Accessed 12 Nov. 2024.
