The Anchoring Effect

This post is the fourteenth part of a series of business-friendly posts, looking at cognitive biases and how they impact our ability to communicate and operate effectively.

What is it?

Humans have a tendency to rely heavily on the first piece of information they hear or see, the ‘anchor’, and then make further judgments based on that initial information.

Interestingly, the anchor can also be arbitrary — it has been demonstrated to work even when the initial anchor is unrelated to the next judgment: The classic experiment is asking a group to write down the last two digits of their social security number and then asking them to judge the price of an item (a bottle of wine for example). The higher the two digits they initially wrote, the higher their estimate.

Why it occurs:

Providing an anchor changes someone’s attitudes to be more favourable to the attributes of that anchor, biasing future answers to have similar characteristics of the anchor.

Where might you see it occur in real life?

It is very commonly used, particularly in relation to pricing.

For example, when purchasing a car; the initial price you see is frequently the anchor and anything lower than that appears like a deal even if that initial price was actually quite high.

If you work in a target driven environment (sales being a classic example), management might “anchor” you by stating expectations of a 50% increase in sales next year. When this is lowered to 25%, you breath a sigh of relief because this is less than the initial anchor.

Why is it important?

The first piece of information someone hears or sees on a topic is going to affect their judgment and perception going forward. Where and how they’re getting their initial information could have huge effects on what decisions they make in the future.​

What is the impact when communicating a message?

There are two key areas to consider. The first is around how you communicate your message, and is primarily seen in any conversation around price (although the same point can be made of a number of factors around your message). By way of example, if you are a charity soliciting donations on a website, setting the preset options to higher values should dramatically increase your average donation value, even if you have an option to donate “whatever you can.” If you are pitching a product, service or idea, keep in mind the impact that price anchoring can have in any future negotiations. Don’t be afraid to state your standard pricing early (but be careful not to arbitrarily raise your price as this could come back to bite you).

In a broader sense though, particularly when faced with a competitive situation, consider how previous anchors may have an impact on how your message is interpreted as well. What can you do to break the anchor?

You can download a handy “quick” reference infographic about this and other cognitive biases here. Next up we will take a look at the Illusion of Truth.