FASTILY

Imagine that you are walking into an electronics store in order to shop for your appliances, more often than not, you would actually see that a flashy, modern, (and usually) expensive refrigerator being presented right at the entrance of the store with all of the functions that you need. As you have looked at the model for quite a few seconds, you might as well be tempted to look at the price tag and think whether it is possible to buy it. In most cases, the selling price would be unaffordable for many customers, so you’d rather walk into the store to look at other fridges. Unless you have a clear agenda, you will probably overspend, which throws your budget off balance. By virtually nothing, the store has successfully maneuvered to you to spend more than you had expected to. So, how did they do it? (The answer will be unveiled in the later part of this article)

What is happening psychologically in your mind is coined as the “anchoring” effect. It was formally discovered by Tversky and Kahneman, whose scientific contributions are invaluable to the development of applied behavioral economics. To put it simply, as they asserted, our brain can be divided into two systems. One system is automatic and instinctive which requires little effort to control and can be trained through repetitive actions. The second system requires much more mental exertion which we usually encounter when dealing with highly complicated and complex tasks. The “anchoring” effect can influence both of the systems by either activating an adjustment mechanism towards the anchor (through the complex system) or facilitating a non-existent world where it tries to makes some associative links with the anchor (through the effortless system). The general idea is that, through these two systems, an “anchor” would influence people’s judgment, although it is totally irrelevant to the discussion at hand.

To test the validity of their findings, they performed an experiment on university students. Now, try this experiment by yourself (and if you are calling your friends, that’s even better). So, take two small pieces of paper and write two numbers “10” and “65” on each, fold them, and ask everyone to pick up one of the two pieces, then return it to you so you could proceed to the other members (they used the wheel of fortune, but they manipulated the wheel so that the outcomes could only be either “10” or “65”). Then, the participants were asked to answer the following two questions: “Is the percentage of African nations among UN members larger or smaller than the number you just wrote (chose)?” What is your best guess of the percentage of African nations in the UN?” Most participants would be able to answer the first one correctly, but their estimations for the second question would be hugely varied. In particular, they found that the answers to the estimates of 10 and 65 were 25% and 45%, respectively. That yields a difference of 20 percentage point, although question 2 in the first case is phrased indifferently with the one in the second case. If you are not aware of the information in advance, it also comes naturally to you that you have very little confidence in your answer. In fact, as of current, all African countries are now UN members, so the correct answer to this question would actually be exactly 100%!

In the experiment they conducted later on, they inquired the participants whether they knew the age that Mahatma Gandhi passed away (at the age of 78), with two anchors being “9” and “140”. They also found that there was statistically a significant difference between the responses of the two groups with different anchors. In this instance, although you do not deliberately steer your thought towards these numbers, the “anchors” create many implied suggestions from these numbers. If you are given number “140”, then it is likely that an image of an ancient person would come to your mind subconsciously – as such the effortless mechanism part of the brain has created an imaginary world in your brain that is more or less linked to this number. As such, your prediction has been influenced by seemingly an irrelevant factor.

The theoretical concept of “anchoring” is also widely applied in many economic scenarios, especially during the process of negotiations. Suppose that you are accepted for a job position in a company and are offered an initial salary. The negotiation process is usually carried out by the interviewer herself, so she gains the position of the first-mover. This is extremely advantageous from the perspective of the company by “anchoring” the discussion in their favor. The resulting effects of it can be explained by both system: by offering the proposed salary as the anchor, your brain tries to analyze the reasoning behind the offer and seeks an appropriate counter-offer, while the effortless system attempts to construct associative networks from the offered salary so as to make this initial salary as reasonably as possible, even though you do not consciously control that. The similar line of reasoning can be applied to auctions, where if there is no reserve price, the auction price of an item should be largely influenced by the first bidder.

So, in the context of the electronics store, how does the anchoring effect come into the picture? Well, the fact that the existence of the flashy refrigerator at the entrance has indeed influenced your pricing mechanism, as soon as you think about it. Therefore, it is more likely that when people enter the store, they would look at models that possess at least some of the special qualities of the featured product at the entrance, which typically belong to the high-end spectrum. When there are unknown qualities of the product, or virtually it is incomprehensible for one individual to quantify such a trait of the product and with (moderate) time pressure, it is more likely that we are drawn our attention to the positive qualities. As a result, we would tend to overestimate the true value of the product in many cases. Therefore, artificially the expected benefits of using the product increase and hence your evaluation of a fair cost-benefit analysis of an item is positively-skewed, but only temporarily. In fact, Galinsky (2011) finds that when there is some uncertainty, high “perceived” anchors usually attract people to look at the upsides of the matter, while low “perceived” anchors draw people to direct their attention to the flaws.

It is actually very difficult to go against these behavioral patterns since it is inherently the nature of human body. However, having realized this, we could minimize the impact of anchoring, by actually not focusing on it. If you are considering buying some new appliances for your apartment and unsure whether to buy the item, put that anchor on something you would have spent otherwise. By that way, it is much easier for you to control your expenditure. In negotiations, however, you should prepare the desired amount beforehand and focus your attention on that to see whether the offered anchor is acceptable; the important thing is that if you are thinking of a counter-offer, make sure that it makes sense. Moreover, repeated interactions would decrease the significance of an anchor as both parties are well aware of their counterparts.