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.
Something to understand about anchoring is that there isn’t anything rational about it. It doesn’t matter if the figure used to anchor is well thought through or chosen at random. In fact Daniel Kahneman and Amos Tversky used a wheel of fortune to generate either a higher or lower anchor in one of their experiments.
When I was in elementary school, my favorite field trip was to the Exploratorium in San Francisco. If you’ve ever visited there, you know they have lots of fun, hands on experiments that give you a direct experience of interesting phenomena – for example, how our hearing perception adapts to make sense of nonsense words if they sound close enough to sensible words in a story, and different experiments with magnetism, optical illusions, and other fascinating and quirky things to play with.
In one of these, some participants were asked these questions:
“Is the height of the tallest redwood tree more or less than 1200 feet?
“What is your best guess about the height of the tallest redwood?”
Here, the redwood height was anchored at 1200 feet. Other participants were asked the same question, but with the anchor height at 180 feet.
I think you can probably guess which group guessed a higher or lower height for the tallest redwood.
Those given 1200 feet as the anchor estimated the height of the tallest redwood at an average of 844 feet. Those given the anchor height of 180 feet guessed an average of 282 feet.*
This is a difference of 55% between the guesses for each, which is a pretty huge difference – but a fairly consistent effect of anchoring.
Which means awareness of anchoring during a negotiation could potentially save you that percentage of money, as well.
Making the first move in a single-issue negotiation is always the stronger position, because you establish the anchor at whatever price you state. If this draws you to spend a few dollars more, or to make the decision to buy a $100 gizmo you might not have bought, or to buy a few more cans of soup you were going to use anyway… that’s not going to make a long term difference in your life.
But if you’re negotiating the price of a car, or a home, and the seller starts at a ridiculously high price, that’s going to draw you to have a higher figure in your own mind that you can live with. Because of that, you may end up spending thousands, tens of thousands, even hundreds of thousands more than you would have.
Which could seriously impact your quality of life.
If you’re faced with a situation where the seller begins with an outrageously high price, Kahneman suggests making a scene and storming out, refusing to accept that figure as a possibility.
Then you can come back and start fresh, with that anchor effectively erased from the negotiation – and freeing yourself from it internally as well.
Another, less dramatic strategy for resisting an anchor is to search within yourself for arguments against the anchor – imagining what the minimum offer the other party might accept would be if you refused to budge, or the consequences to the seller if they couldn’t get you to buy.
As with all biases, anchoring is rooted in mental processes that work very well most of the time. So there’s nothing to beat yourself up over when you are affected by it. But being aware of this bias, and consciously freeing yourself of it when it really matters, with larger purchases, could make a significant difference in the decisions you make… and the money you have left afterward.
*The actual tallest redwood on record is called Hyperion, measured at 380.8 feet tall in 2019
PS: I’m currently expanding my life coaching practice. Go to my website to sign up for a free 30-minute initial conversation.
Recent Comments