Anchoring is a cognitive bias that describes how humans tend to focus on the first piece of information presented and use it as an ‘anchor’ with which to make estimations and decisions. Once an anchor is set we adjust our judgements up or down from it.
Suppose you want to buy a lollipop from your friend Jimmy. Jimmy offers to sell you his lollipop for $10 and you think that is outrageous. Still, you are sugar-crazed and you manage to negotiate Jimmy down to $6. You leave thinking you got a great deal, nevermind that the lollipop was only worth $2 to begin with.
By setting a high anchor of $10, Jimmy influenced your perceived value and controlled the negotiation as you negotiated down using the initial price of $10. That is anchoring.
Why is it important?
Anchoring is one of the strongest biases (a systematic deviation in judgement) uncovered by Amos Tversky and Daniel Kahneman, one of the only psychologists to have won the Nobel prize in economics.
In 1975, Tversky and Kahneman ran a famous experiment in which they asked test subjects the percentage of African countries in the United Nations. Except that before answering the question participants were told to spin a wheel of fortune (with numbers from 0 – 100) rigged to always land on either 10 or 65. Only then were participants asked whether the percentage of African countries in the UN were lower or higher than the wheel of fortune number followed by an exact guess. What they found was mind blowing. Though the number from the wheel of fortune obviously had no bearing or was connected in any way to the percentage of African countries in the UN, that information seriously biassed participants. Those that landed on 10 guessed around 25% of African countries in the UN, those that landed on 65 averaged 45%. The anchoring effect is so strong that even unrelated pieces of information have an effect in our decision making. If we are going off of no information, we will grasp anything that we can even if we know it should have no bearing on the final outcome.
Anchoring is so strong that:
- Experts and non-experts are affected similarly by the bias
- If test subjects were paid for accuracy the bias remained strong
- Telling test subjects explicitly that they should not take the wheel of fortune number into account when estimating the percentage of African countries in the UN only had a small effect on the result
In many situations, people make estimates by starting from an initial value that is adjusted to yield the final answer. The initial value, or starting point, may be suggested by the formulation of the problem, or it may be the result of partial computation. In either case, adjustments are typically insufficient…that is, different starting points yield different estimates, which are biased toward the initial values.
Kahneman, Slovic and Tversky
How can you apply it?
Anchoring is common in many buyer/seller transactions. Consider how you negotiate off the given price when buying most things rather than establishing your own value for the asset. Retail stores are all too familiar with anchoring. If a jacket was originally priced at $50 and now it is being sold at $45, it must be a bargain!
First impressions and their impact are also a form of anchoring. It is challenging to alter what you think of a person after a bad first impression. Making a good first impression works in a similar way, which is why it’s so important to nail the initial part of the interaction.
Researchers have also shown that when trying to decide how someone else feels, we start by anchoring onto how we would feel in the situation and adjust it for how we think the other person might feel.
Anchoring has such a strong effect, a lot of it subconscious, that avoiding it is pretty darn difficult. In negotiation, it is important to come with a predefined value for what you are negotiating about before being biased by any other estimate. In fact, as a negotiator you have a much stronger position if you provide the first value and anchor the conversation around that, something which might seem a bit counter-intuitive. This applies for other aspects of life as well — always set the anchor in your best interest!