What is... | January 31, 2013

What is anchoring?

You get what you pay for - or do you? Sometimes prices of products you never intend to buy can change your view.

You know that very expensive bottle on the wine list at your local bar that you’ll probably never buy? It may still be responsible for you spending more – due to the way it “anchors” the prices of other wines on the list and makes them seem cheap in comparison.

Two of the second-cheapest glasses
The topic of anchoring – as it is known in the behavioural economics world and notably in a 1974 paper by Daniel Kahneman and Amos Tversky – is well documented on menus. Not only is there expensive wine, there have been many instances of novelty items listed for sale; a diamond cocktail or a luxury hotdog complete with the highest quality ingredients and prices to match.

The idea goes that once you see the $69 hotdog, cited by author William Poundstone on his Priceless blog, paying over the usual price for a regular meal won’t seem as outrageous.

I’ll take €500 for the carpet…
Anyone who’s tried to negotiate a price in a market has probably been exposed to anchoring. When the stallholder opens the bidding at an extraordinarily high price, they may be trying to set an anchor. The high starting point is the reference for the bargaining – perhaps with the buyer setting their sights on paying “half” no matter the starting price.

A similar dynamic can be at play in negotiations for much more expensive items, such as cars or houses (albeit usually with more pricing information available), so it can pay to be aware.
Likewise, this 2010 study and others like it lay the case that professional investors also get caught in the trap of anchoring when forecasting earnings.

On the small screen
Although few of us will end up on a TV game show, they give another example of anchoring. Researchers examined data from TV game show Golden Balls specifically looking at how contestants work together. The study, co-authored by Nudge’s Richard Thaler and released in 2011, finds surprisingly high co-operation for amounts of money “that would normally be considered consequential but look tiny in their current context”.

How do we combat this thinking trap? Being aware of it is a good first step. When you see an expensive bottle on the wine list or a stallholder opens a trade at a high figure, try taking a moment to asses if it’s changed your perceptions of price. Perhaps you can put yourself in control by recalling how much you want to pay and go from there.


eZonomics team
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