Emotions, Moods and Reactions

You’re out for a very nice dinner with your spouse, and you decide to share a bottle of wine. You look at the wine list, and you see several bottles listed in the $170 range, a few that are in the $50 range, and quite a number of them around $80-$90. $80 is more than you would’ve thought to spend when you left the house, but somehow you’re drawn to the $87 bottle of Cabernet.

$50 being the lowest price seems miserly for a special evening out, and with $170 as an example of a “very nice bottle of wine,” $87 now seems very easy to accept.

This is an example of anchoring. The $170 figure drew your expectations in the direction of that figure, higher than you would’ve chosen otherwise.

If the highest price bottles were all in the $80-$90 range, you probably would’ve chosen a less expensive bottle.

Another example of anchoring is called “rationing,” where you’re told that there’s a limited supply of something.

In one experiment at a supermarket, Campbell’s soup was on sale at 10% off. When there was a sign that also said, “Limit of 12 cans per person,” people bought an average of 7 cans per person – twice as many as when there was no limit. The “anchor” of 12 cans drew people away from the 3-4 cans they would otherwise have bought, and toward the number 12.

If you look for it, you’ll see this technique everywhere in marketing. In most cases it’s relatively harmless, drawing you to buy something that’s a few dollars more than some other product, or to buy a higher quantity of something you would probably use anyway. But as we’ll see, awareness of this technique when you’re facing higher cost items like a car or a home can save you a lot of money.

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I’ve been focusing in these columns on the ways our emotions can interfere with managing our money and investing well. Today I want to talk about the positive state that we want to aim for most of the time – which will connect us with the emotional resources and clear thinking we need to make our best decisions.

Researchers like Steven Porges call it our social engagement system.

When we feel safe, and trusting, and relaxed, our heart rate and blood pressure lowers, and our heart rate variability increases – our heart rate rises a little on the inhale, and lowers on the exhale, and the difference between these is our heart rate variability. Higher heart rate variability is a good thing. This is all very beneficial for our immune system, our cardio-vascular system, our organs, and our overall health. Read More