3 Exploits Of The Anchoring Effect

Let’s say that you are looking for a new smart phone from a pre-determined brand X. You visit a market for smart phones, and inside the very first store, you see the smart phone you are looking for selling for 500 Euros, with a 40% discount on top of it. That looks like a pretty sweet deal. Now ask yourself if you would buy this deal, and note your answer. You also come across the same smart phone in the tenth store along the street, and here it is priced for 330 Euros with a 12% discount. Now ask yourself if you would buy this deal, and note your answer.

This scenario represents numerous similar experiments conducted by several psychological researchers over the years in the field of heuristics. The majority of the participants typically chooses to buy the smart phone from the first shop, and is not very convinced about the deal in the second shop. The first store offers a large discount, and the second store offers a relatively smaller discount. But objectively speaking, the product can be bought from the first store for 300 Euros and from the second store for 290.4 Euros, which clearly shows that the second store offers the better deal. Yet, why do most people have a tendency to be uncertain about the second deal?

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The phenomenon observed here is a cognitive bias called the anchoring effect (see also: The Hindsight Bias) . It is partly the effect that the first piece of information about a potential choice has on the final decision. In this case, the numbers 500 and 40 would be the anchors. It appears to the intuitive mind (System-1, according to Daniel Kahneman) that 40% off of 500 Euros must be larger than the second deal. This effect is trickier than it appears to be, and there are several scenarios where it is employed by one party to exploit the other. Let’s have a look at 3 such important scenarios.

Negotiations – The Age Old Exploit of the Anchoring Effect

When it comes to job or deal negotiations, the party that moves first in terms of mentioning a number has the advantage of holding an anchor. For instance, if I expect a price of 50 Euros for a random item, and the other party mentions 100 first, I am inclined to try and bargain to a price lower than 100, but ultimately likely closer to 100 than 50. This works only when the anchor is within a ‘reasonable’ frame of reference. For instance, in the aforementioned example, if I expect 50, and the other party mentions 1000, it’s not going to have an effect.

Another way in which the anchoring effect is employed in negotiations is by using qualitative anchors, thereby diverting attention of the counterparty from numbers, thereby skewing the number value. Going back to the same example, if I expect 50 for the random item, and the counterparty chooses to talk about how much her grandfather treasured the said random item, all of a sudden, the expected value for the item is no longer 50. It becomes uncertain.

Sales – The Anchoring Effect Camouflaged

All of the “XX% off” signs you see in stores as well as supermarkets employ the anchoring effect. If the price of the item is small, they use the percentage number. This is because for prices less than 100, the percentage number is usually higher (anchor). For highly priced items, they use the actual number that is being discounted, because the actual number would be larger than the percentage. Either way, the goal here is to convince your intuition that you are seeing a good deal here. Many supermarkets and stores have gone onto much higher levels of anchors, such as special colours on the price markers, when an item is supposed to be on sale. So, your cognitive system gets ‘trained’ to think that it must be a good deal whenever you see that colour appear in the store.

Statistics – The Numbers Behind the Anchoring Effect

This is the field where the most deceit occurs, in my humble opinion.

Auto manufacturers say that their latest model can do 20 kilometers per liter of fuel (mileage). If the same model were to be evaluated for how many real world kilometers it would do for 100 liters of fuel, things could look different.

Companies literally use shady statistical calculations to show that they have reached their earnings targets. They likely set their own as well as their stake-holders’ anchor to the said target number, and worked themselves into a corner.

Fast food chains and food brands offer dishes with 1% fat content only. While your anchor lies on the fat content, you are likely to not focus on the other contents that enable the rich taste that you enjoy, but ultimately could be unhealthy for you.

These are just a few examples, but you get the picture: there are numerous such deceits in the field of statistics.

Conclusion

The anchoring effect is a cognitive bias, and we are all susceptible to it, by definition. Being aware of the bias does not help to a great extent, because most of the time, when the effect actually occurs, we are not aware of its occurrence (the paradox). What could help is when presented with a prospective decision, if we choose to reformulate the same problem or scenario in a few different ways, by switching the subject, predicate, and / or the measure of the numbers to what it actually means to us, we could begin to see a more objective picture. For example, in the very first example, instead of looking at the percentages, if I chose to ask how much I am actually paying for the smart phone, I would be able to see the better deal straight away.

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