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: