A cognitive bias that occurs when irrelevant information impacts our decision making, which often leads people to act irrationally. It occurs when people use an initial piece of information, known as the "anchor", as a reference point for subsequent decisions. This bias can lead to errors in judgment and decision-making, especially in situations where the anchor is not relevant or accurate.
Definition: When irrelevant information impacts our decision making process.
Example: Real estate.
Example: Market prices as an anchor for how much we value something.
Example: Salary negotiations (the first offer).
Reference: Tversky and Kahneman experiment (1974) - Wheel of Fortune as an anchor for questions about UN African Nations.
Reference: Drazen Prelec, George Loewenstein, and Dan Ariely experiment - Social Security Number as an anchor for prices people were willing to pay.
Insight: We find it difficult to challenge our previously held beliefs (anchors).
Insight:Herding (going with the crowd) and self-herding (basing personal decisions on previous decisions we have made) are dangerous consequences of anchoring.
Insight: Confirmation bias (when we interpret new information through the lens of our preconceptions) can result from anchoring to our previous decisions.
Insight: "The less we know about something, the more we depend on anchors."
Insight: More experience, knowledge, or research makes us less prone to anchors.
Insight: Anchoring is powerful with products that are first to market, where there is no reference price.
Insight: "Past decisions are no guarantee of future results. Or, to put the lesson another way: Don't believe everything you think."
Definition: People consider prior information to value a quantity before estimating it.
Example: The listing price of houses for sale anchors peoples expectations.
Insight: Anchoring can be measured by comparing the ratio of the differences in responses to different anchors, to the differences in the anchors (anchoring index).
Insight: Anchoring effects can come from adjusting estimates relative to the anchor, or as the anchor having a priming effect.
Insight: Anchoring strongly influences decisions about money.
Insight: Anchoring influences our purchases.
Insight: Once we buy a product, we are anchored to that price.
Insight: Economics assumes supply and demand are independent. In reality we can be anchored by advertised prices, recommended retail prices, new product prices - these are all supply side variables.
Reference: Uri Simon-sohn and George Loewenstein study - people moving to a new city are anchored to prices for housing in the former city.
Insight: Anchors can be used as "Nudges" to influence behaviour when designing systems or products.
Insight: The more you ask for in negotiating, the more you tend to get.
Example: Tipping for taxis using technology to anchor passengers to suggested tips.
Example: Anchoring juries to sums won in previous similar cases, or to a company's profits.
Insight: Our view of how money works can be anchored to our life experiences or place in history.
Insight: Investment decisions are anchored to personal experiences.
Insight: The Sunk Cost Fallacy (anchoring decisions to past efforts or spending that has no relevance to the future) is particularly damaging, as people change over time.
Insight: "an anchor of psychology is not realising that rational people can see the world through a different lens than your own."
Definition: The anchoring effect is what happens when arbitrary numbers impact quantitative judgements.
Example: Social security number as an anchor for how much a bottle of wine is worth.
Insight: Anchoring has a powerful effect in negotiations.
Insight: In negotiations, going first is likely to provide an advantage.
Insight: In negotiation, you can anchor peoples emotions by uncovering the fear of loss.
Insight: With price negotiation, particularly when there are unknowns, it may be best to let the other party start the negotiations, showing their hand first.
Insight: There can be downsides in negotiation with letting the other side start, and therefore anchor.
Insight: Be prepared, and gather all information which can be used to anchor price.
Insight: Anchoring is important to consider in pricing strategy.
Insight: Existing products in a market influence (anchor) prices for new similar products.
Insight: New, unique products can set a reference anchor price.
Insight: You can create an anchor price for your user base if they do not have experience buying what you are selling. Consider creating another product with a higher price, to anchor expectations high.
Definition: "The unconscious use of a value that is easily accessible in memory as a "starting point" for making a judgment about a quantity or cost."
Example: Charity donation suggestions
Insight: When we don't have any meaningful data to make a decision, we often rely on any information that is available, even if we know it is irrelevant.
Reference: Dan Ariely experiment - Social Security Number as an anchor for the value of a bottle of wine
Insight: Anchoring undermines the belief that market prices are based on supply and demand
Reference: BJ Fogg - uses the term "anchoring" to link new habits to old ones
Insight: Old habits can keep new ones in place by anchoring them to previously established behaviours.
Reference: Tversky and Kahneman experiment (1974) - Wheel of Fortune as an anchor for questions about UN African Nations.
Example: Sales projections or targets can lead our beliefs about what is possible rather than realistic evaluations.
Insight: We can find it hard to work without a point of reference.
Definition: The human tendency to rely heavily on an initial piece of information when making decisions
Reference: Tversky and Kahneman experiment (1974) - Wheel of Fortune as an anchor for questions about UN African Nations.
Insight: Anchoring can influence our perception of fair pricing.
Example: Anchoring to historical stock/asset prices, and therefore making poor decisions about buying or selling.
IV. Summary of Key Insights & Principles
Decision Making
Humans are consistently vulnerable to anchors when making decisions.
Other people's decisions might be best for them, but not for you.
Anchoring effects are particularly strong in purchasing decisions.
The more relevant information you have, the less prone you are to anchoring effects.
Do your research.
Ignore irrelevant information.
Personal Finance
Our investment decisions are anchored to personal life experiences and place in history.
It is damaging to anchor investment decisions or spending to past decisions (sunk costs) that have no relevance to the future.
Make financial decisions based on personal circumstances and goals, not other peoples.
Ignore sunk costs.
Negotiation
Going first in negotiation can have an advantage, as it creates an anchor.
If there are many unknowns, or few benchmarks, letting the other side show their hand might be a better tactic.
The more you ask for, the more you tend to get.
Go first in negotiation if alternatives and variables are well known to both parties.
Go second in negotiation if there are many unknowns.
Ask for what you want.
Product Pricing
Anchoring effects will impact how product pricing is viewed by markets.
Existing products in markets act as anchors of price.
Unique or new products have the advantage of setting pricing anchors.
Research the market.
Look for gaps in the market to exploit the lack of existing price anchors.
Look for opportunities to bring something new or unique to a market or consumer base.
Habit Building
New habits can be embedded by building on (anchoring to) existing habits.
