How to Think Critically: Anchoring

I’m pleased to announce the first-ever holiday edition of How to Think Critically. If you’re planning to do your Christmas shopping soon, this post might just save you some money!

The mental phenomenon called “anchoring and adjustment” was first described in the 1970s by the psychologists Amos Tversky and Daniel Kahneman. When we’re trying to estimate an unknown quantity, such as judging whether a price tag is reasonable or guessing what percentage of the population belongs to a certain age group, the first number we see tends to become a benchmark that colors all our subsequent estimates.

If you get charity solicitations in the mail, you’ve probably seen the anchoring effect at work. If it’s written by a smart advertiser, the part of the letter that asks you to check off the amount you want to donate will look like this:

_ $250	_ $100	_ $75	_ $50	_ $25

and not like this:

_ $25	_ $50	_ $75	_ $100	_ $250

In experiments that expose people to situations similar to this, the first layout will consistently get higher donation amounts than the second layout. The “$250″ you see first becomes an anchor that biases your judgment, subconsciously affecting your decision about how much is a reasonable amount to give.

Surprisingly, this effect persists even when the numbers that people are exposed to have nothing to do with the price of the item – as in this study by MIT economists. Study participants were asked to bid on an array of everyday items, from a bottle of wine to a cordless keyboard. But before placing their bids, they were asked to write down the last two digits of their Social Security number and then say whether or not they’d be willing to pay that amount for the items on bid. As it turns out, this meaningless exercise made a great deal of difference to the amount of the students’ bids:

If people were perfectly rational, then writing down their social security numbers should have no effect on their bids. In other words, a student with a low valued social security number (like 10) should be willing to pay roughly the same price as someone with a high valued number (like 90). But that’s not what happened. Look, for instance, at the bidding for the cordless keyboard. Students with the highest social security numbers (80-99) made an average bid of $56. In contrast, the average bid made by students with the lowest numbers (1-20) was a paltry $16. A similar trend held for every single item. On average, students with higher numbers were willing to spend 300 percent more than those with low numbers.

Retailers are well aware of the anchoring effect and consistently use it to their advantage. Take this post from the amusingly titled blog You Are Not So Smart:

You walk into a clothing store and see what is probably the most bad ass leather jacket you’ve ever seen.

You try it on, look in the mirror and decide you must have it. While wearing this item, you imagine onlookers will clutch their chests and gasp every time you walk into a room or cross a street. You lift the sleeve to check the price – $1,000.

Well, that’s that, you think. You start to head back to the hanger when a salesperson stops you.

“You like it?”

“I love it, but it’s just too much.”

“No, that jacket is on sale right now for $400.”

It’s expensive, and you don’t need it really, but $600 off the price seems like a great deal for a coat which will increase your cool by a factor of 11.

One of my first jobs was selling leather coats, and I depended on the anchoring effect to earn commission. Each time, I figured it was obvious to customers the company I worked for marked up the prices to unrealistic extremes. Yet, over and over, when people heard the sale price, they smiled and wrestled with their better judgment.

Of course, labeling an item with an inflated sticker price and then offering the customer a “discount” is one of the oldest tricks in the book. But anchoring can be used in even sneakier ways. Some retailers, for example, deliberately offer items for sale at “decoy” prices they don’t expect anyone to pay, knowing that this will make everything else they sell look like a better deal. Some examples are cited in this review of William Poundstone’s book Priceless:

Once you’ve seen a $150 burger on the menu, $50 sounds reasonable for a steak. At Ralph Lauren, that $16,995 bag makes a $98 T-shirt look cheap.

According to the review, the artist Damien Hirst even bought one of his own works – a platinum skull encrusted with diamonds – for $100 million, as a way of boosting the perceived value of the others. Apparently, it was successful, as a later auction of Hirst works smashed presale estimates.

The next time you go to the mall, you can be assured that some ad or salesperson will try to use this trick on you. The real dilemma for shoppers is that, unlike other kinds of cognitive bias, the anchoring effect tends to persist even when people are told about it. How to get around this? My suggestion: If you’re dead-set on getting a deal, don’t ever buy something the moment you lay eyes on it, even if it seems like a great bargain. Go to a competitor’s store (or check the internet, if you have a smartphone) and compare prices. Having two or more numbers to compare against each other, rather than one number to anchor your decisions, ought to make it easier to judge the true value of what’s on sale.

Other posts in this series:

About Adam Lee

Adam Lee is an atheist writer and speaker living in New York City. His new novel, Broken Ring, is available in paperback and e-book. Read his full bio, or follow him on Twitter.

  • http://www.blind-mind.com Andrew A.

    Human psychology can be so strange some times. I wonder if you can defend yourself from this by prepping yourself with a purposefully low price. Think about buying similar things for a much lower price before actually checking out the prices, and maybe you won’t be so ready to part with so much cash.

  • Valhar2000

    Shouldn’t you be able to give yourself an anchor and then use that, like Andrew suggests? Of course, the number you select as an anchor may itself be affected by another number you have just been exposed to, but still.

  • http://superhappyjen.blogspot.com SuperHappyJen

    Before I go into the store now, I’m going to think to myself “TEN DOLLARS!”

  • kennypo65

    The best thing about being an atheist: no more xmas shopping. Don’t buy for me ’cause I’m not buying for you.

  • MissCherryPi

    I think that Sam Seder is using this to get people to subscribe to his podcast. I love podcasts. I subscribe to many free ones, and I don’t like the idea of paying a monthly fee for them, but I have bought individual episodes of a show I wanted to hear, or things advertised on podcasts – fair trade coffee, t-shirts with the logo on it, etc.

    Check this out, read it to the bottom, and then scroll back up to the top. Even though you *know* the four higher levels of membership (out of seven) are a joke, the $10/month sounds much more reasonable than it did at first.

  • DSimon

    Before I go into the store now, I’m going to think to myself “TEN DOLLARS!”

    We should all start saying that out loud before we walk into stores. It’ll be like a secret rationalist handshake.

  • Grimalkin

    I used to work for a charity that did those solicitation mail-outs. Our trick was a little different than the one described. Basically, we put all our donors into “categories.” If you gave $20 to us, your mail-out would have “suggested donations” of, for example, $25, $36, $50. If you gave us $30, your “suggested donations” would be $36, $50, $75. So it would always start you slightly higher than what you donated previously.

    But here’s the thing, you weren’t locked into your category. So let’s say that you’ve been giving us $20/year for five years, you’ll suddenly find yourself getting the $36, $50, $75 slip. It’s donation inflation!

    The worst part? It worked. If we had put everyone into the high donation category, most people would ignore the suggestions and write in something in their comfort level. But if we gave them options that were close to, but slightly higher than, their previous donation, they would avoid the mental strain of having to think for themselves and just pick one of the options we gave them. Almost no one wrote in their own amount. The great thing for us was that people often base their idea of what is a reasonable donation to a particular charity on their historical behaviour. So the whole donation inflation trick worked beautifully. You might decide that my charity was only worth $20/year, but within a couple years, we would have you forking up $100/year and thinking that was just as reasonable as your initial assessment, with absolutely no stewardship or effort on our part.

    I love working in the not-for-profit industry, but there are definitely some practices that make me question whether I could ever trust a charity again…

  • Grimalkin

    My trick to get around this, by the way, is to decide a) what I’m going to buy, and b) what a reasonable price is for that item before I ever leave home. That’s not to say that I’m immune to the effect, but I’m at least immune to deliberate attemps to use it against me.

    I try never to buy anything on impulse, and I never EVER buy anything from the aisles along the check-out counter. If I see something on sale that I really want and it seems like a too-good-to-pass-up deal, I walk out of the store, have lunch, do some other stuff, and then go back. Most of the time, I’ve realized within 10-15 minutes of having left the store that either I really don’t want that item as much as I thought I did, or the deal isn’t as good as I thought it was. Most of the time, I forget about it entirely – an excellent indication that I can’t have wanted it that badly in the first place.

    Humans are just too stupid for us to go around trusting our instincts and impulses.

  • Richard P.

    I developed a plan to over come this too.
    The first time I go looking for an item I go without my wallet. I go price shopping before I go item shopping. Once I have decided on what Item to buy, I go home and get my wallet. This allows me the time to consider my choices and to decide whether I really need it or not.

    Amazing how many times I just walk away and decide to wait.

  • http://neatshirts.blogspot.com Abeille

    @ Grimalkin
    I’d love to hear more about these practices. Email me?

    abeille.autumn @gmail.com

  • Alex_Siyer

    And, there always will be people obsessed enough to buy the $16,995 decoy bag.

  • http://politicalgames.posterous.com themann1086

    I can’t find it right now, but Cracked.com had a funny article on this and other advertising tricks that your brain falls for every single time. It was good, I’ll see if I can track it down.

  • Stephen P

    Before I go into the store now, I’m going to think to myself “TEN DOLLARS!”

    Can I interest you in this delicious can of cola, Madam, or perhaps in this exquisite Mars bar?

  • bbk

    You know what the problem is? It’s that the scalper selling inflated tickets on game day gets arrested, but the stadium owners are allowed to do the same thing.

    I don’t think that anchoring is necessarily a bad thing. We rely on all kinds of social cues to decide if something is a fair deal is. We want to pay a lower price but also want to avoid being labeled a good for nothing cheapskate. There is a social stigma that implores us to make sure that the counterpart to our trade isn’t getting a bum deal. That’s why restaurants pay their wait staff criminally low wages. You may be fully aware that you just overpaid by $12 for a $14 glass of wine, but you’ll still give the barkeep a handsome little tip. That’s why anchoring usually involves at least 3 prices the high and low one are both decoys. Who is really going to bother calling in to a radio station and mailing in a check for a $5 donation? They only mention it to give you the satisfaction of feeling like a generous philanthropist when you offer them $50 in exchange for the $2 commemorative keepsake.

    In general these are all various forms of price discrimination. The charity that sent different recommended donations to their supporters based on prior year donations are especially odious. That charity should just end, I’m sorry, I don’t care if they saved baby seals and pulled kittens from trees. A few years ago Victoria’s Secret would mail out catalogs to women with higher prices than the catalogs they sent to men. When some people found out about it, the company got sued. These tactics amount to lying. It’s a con.

    Let’s just get back to the scalper for a minute: it should all be illegal. You can’t argue that airlines and entertainment venues should be laissez faire but scalping should be illegal. That’s where rationality comes in. Look outside of the US for consumer protections that make sense. In some countries you can’t mark up an item more than a certain percentage above what it costs to produce the item. In some countries the salaries of service workers are protected and there are minimum prices for things such as haircuts. Coupons, sweepstakes, and other forms underhanded price discrimination are not allowed. In some countries, retail prices have to be set at one price and cannot be changed for the remainder of the year. You can’t have a sale, you can’t advertise a discount. It’s simple: if you really want to overcharge for your product, no one will try to save you when you start going out of business. So if you want to stay competitive, you better make your prices as low as you can.

  • Joel Wheeler

    I love this post! Although I have to admit it made me a little smug about my own shopping habits. I don’t shop often, and when I do, I leverage some of the same self-regulating ideas already suggested, and try to apply some strict criteria to purchases. Is the item in question close to something I’ve already visualized and wanted? Or is it an impulse? Stand back or walk away: do I LOVE it, or merely like it? Do I think it’s likely to be popular and sell out quickly, therefore I should act now, or should I wait and see if it goes on sale or if I just forget about it?

    I’ve found that the purchases that have the most enduring appeal are the ones that meet the criteria AND were a “good deal”. Mediocre items obtained “cheaply” tend to become forgettable.

    And, of course, there’s nothing like deciding it’s worth it to nab the last perfect item in my size, even though the price could be better, THEN find out at the POS that it’s actually had further price reductions.

  • http://www.theonion.com/articles/my-antidrug-is-alcohol,10771/ Blotto von Bismarck

    On the other side, some people refuse to purchase anything if it isn’t expensive enough. If your only purpose in life were to show off your ‘bling’, wouldn’t you feel stupid if you bought the $5000 watch and bragged about it to your friend, who purchased the $5500 one?

  • MS Quixote

    Of course, labeling an item with an inflated sticker price and then offering the customer a “discount” is one of the oldest tricks in the book.

    True enough…it’s something in the customer perception of the pricing. As a small business owner, there was no difference between asking $14,995 and $14,000 for the same item. Thus, there was no good business reason to ask anything other than the $14,995.

  • cheribom

    themann1086:

    I believe this is the article you were looking for:
    http://www.cracked.com/article_18805_5-ways-stores-use-science-to-trick-you-into-buying-crap.html

  • Karen

    Wow, I’ve never heard of this and I hate to admit, I’ve fallen for the “marked down” routine several times!

  • Mackrelmint

    When I read this the other day at You’re Not So Smart, I realized that this was exactly what a working group I’m involved in had been discussing as an issue, without having a name for it. This group is trying to collaboratively create a wildlife management plan that affects many different communities across a huge region of my country. We’ve been trying to maximize community participation in the drafting process to increase the public’s input and hopefully as a result, also increase their agreement to the management decisions that result from the final product.

    We’ve been struggling with how best to present what we, as persons with technical training in our fields, feel to be reasonable thresholds for management actions and what those actions are. Ideally the communities themselves would come up with exactly what we think will be best for the animal population being considered but we don’t anticipate that to happen. Do we suggest the thresholds and actions we want to see happen and risk them feeling as though these are unreasonable, that they are being dictated to and reject the plan entirely (and then have huge difficulty implementing the plan) or do we give them completely free rein to suggest thresholds and decisions that may depart in significant ways or be partially or completely unreasonable from our perspective but might be better supported overall (and therefore more effective in practise).

    We know that having something to critique is often easier to work from than being given nothing at all. Given that and knowing about the anchor effect, how ethical is it for us to then present hypothetical scenarios and actions if these unconsciously influence their suggestions to us, especially if our intent is to have the plan’s content be largely based on community input? How ethical is it for us not to do so, if we have the technical training that the public doesn’t have in this field of study and to best reflect ethical conservation practises?

    ‘Tis interesting food for thought!

  • Yahzi

    It never worked for Maxwell Smart. No matter where he started out, he always ended up with “would you believe two boy scouts and a dog?”

  • http://she-who-chatters.blogspot.com D

    @ Mackrelmint (#20): A question of ethics? I can help! OK, it’s easy: first, you need to decide your standard of value; are you a consequentialist, a deontologist, or a virtue ethicist? If you are a consequentialist, then you should pursue the course of action that obtains the best consequences – to do this, decide which species you will include in your moral community, and maximize their happiness for the foreseeable future. If you are a deontologist, then you should fulfill your Kantian duty – to do this, reason out what your hypothetical imperatives are, and reconcile them with your categorical imperatives. If you are a virtue ethicist, then you should follow an example set for you by a role model – ask yourself, “What would Batman do?”

    Seriously, every question of ethics is compounded by a kind of observer effect – if you think it’s not, then you’re simply unaware of the particular observer effect in play. Being aware of moral factors changes your moral decision process. So what’s more important to you? Do you want to make sure you’re not putting the psycho-economic screws to your potential donors, or do you want to make the most positive ecological impact you can? You’ve clearly outlined just how these two principles are in conflict, but weighing them directly against each other and arriving at a decision is what ethics is really all about, so double-check your work and make the decision you can live with.

    @ Ebonmuse (OP): Great post! And timely, to boot! As for my own shopping habits, I typically decide the kind of thing I want to buy first, then get a price in mind, then see what prices are available, and then comes the utility calculus (oi!). I don’t know whether this makes me a good shopper or a huge nerd (full disclosure: yes, I do know), but I weigh factors like how many hours of enjoyment I’ll be likely to get out of Feature X of Game Y’s “Edition Z,” as compared to my expected hours of enjoyment for the total purchase price: if the feature raises the fun-to-dollars ratio, then I upgrade; otherwise, not.

    For gift shopping, I shop for items on multiple websites and in multiple stores, weigh discounts and inconvenience (for shipping or multiple stops on a shopping run), and then outline a purchasing plan. I deliberately ignore scheduled mass-consumer shopping days like the day after Thanksgiving. I should probably mention that I started Christmas shopping a month ago, and won’t actually spend a dime for another couple of days yet. See? Huge nerd. This is what happens when concepts like “marginal utility,” “expected return,” and “opportunity cost” are all rattling around in the same brain. Still, it’s totally worth it when I get to call out salespersons for lowballing me or pulling other dirty tricks.

  • Staceyjw

    Wow, I’ve been a fool for so long! I’ve been in solar sales for 8 yrs, the last 3yrs B2B, and sold many millions of dollars worth of systems without even knowing of this trick.

    Silly me, I thought that giving your customer a quality product that fits their needs, at a fair price, with a minimum of hassle and a good attitude was the best way to sell, and build a client base.My regions that started with zero customers now produce a few million a month each,all from steady customers- so there must be something to this obviously naïve sales approach.

    Of course, if you sell to people you will only see once, tricks may be helpful. But if you want steady sales from the same customers over the long term, honesty really does work.For every sale you lose by being truthful, you gain hundreds more profitable sales; when customers know you are there to help, they bring ALL their business to YOU, and will happily pay a little more too.

    As for shopping, I HATE it, and avoid it as much as possible and have tricks to avoid spending.

    If I find many things I want, but I shouldn’t buy them all, I will walk around with all of them, but walk out of the store empty handed. This works great when you go for one thing, but end up with a cart load- leave that cart, walk out. Come back in for what you originally needed if you must, but leave the cart full of stuff behind! (I usually put the stuff away, but not always) If you like to shop, this allows you to have the experience with none of the regret. I hate shopping, so only do this when. gets out of control.

  • http://GodlessPoetry.blogspot.com Zietlos

    Staceyjw #23: That’s kinda mean, the shopping thing, it leaves extra work for the employees, often at closing when they are on unpaid overtime, at least in my area. If you irreperably have a shopping urge, do it online and just empty the cart when done, that way it doesn’t kill the time of the minimum wagers.

    Also, you’re dealing with a niche product. There is a difference to selling what should be a generic commodity, like a shirt or frying pan, and selling a large-scale fixed-asset installation that is still in its growth stage of business. As someone in sales, you SHOULD know this. No one goes “Well, I’m buying a new multimillion dollar server for the entire worldwide company… But they say if I buy now, I get 2% off! No time to think! Go!”. When decision-making is decentralized, and requires multiple people, this method is ineffective, and I am assuming your business targets involve such organizations, even if it is merely a 2 person partnership, the debate ruins the effect.

    So tl;dr: This doesn’t apply to you, not everything on the internet does, don’t get offended. This is for consumer-level low-commitment high-substitute products, the “mass market”, which while not explicitly stated in the OP, is heavily implied, IMHO.


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