What is Anchoring?

A video explaining Anchoring Bias by Rolf Dobelli the author of The Art of Thinking Clearly on the IDFC Mutual Fund Youtube Channel.

What is Anchoring? And why the wheel of fortune makes our heads spin

Anchoring is a cognitive bias where an individual depends too heavily on an initial piece of information offered to make subsequent judgments during decision making. Once the value of this anchor is set, all future negotiations, arguments, estimates, etc. are discussed in relation to the anchor.

Here’s an example

When was Abraham Lincoln born? If you don’t know the year off the top of your head, and your smartphone battery has just died, how do you answer this? Perhaps you know that he was president during the Civil War in the 1860s and that he was the first U.S. president to be assassinated. Looking at the Lincoln Memorial in Washington, you don’t see a young, energetic man but something more akin to a worn-out 60-year-old veteran. The memorial must depict him at the height of his political power, say at the age of 60. Let’s assume that he was assassinated in the mid-1860s, making 1805 our estimate for the year he was born. (The correct answer is 1809.) So how did we work it out? We found an anchor to help us – the 1860s – and worked from there to an educated guess.

Whenever we have to guess something:

  • the length of the Mississippi River?
  • the population density in Russia?
  • the number of nuclear power plants in France?

We use anchors. We start with something we are sure of and venture into unfamiliar territory from there. How else could we do it? Just pick a number off the top of our heads? That would be irrational.

Unfortunately, we also use anchors when we don’t need to

For example, one day in a lecture, a professor placed a bottle of wine on the table. He asked his students to write down the last two digits of their social security numbers and then decide if they would be willing to spend that amount on the wine.

In the auction that followed, students with higher numbers bid nearly twice as much as students with lower numbers. The social security digits worked as an anchor – albeit in a hidden and misleading way.

Example: Wheel of Fortune

The psychologist Amos Tversky conducted an experiment involving a wheel of fortune. He had participants spin it, and afterward, they were asked how many member states the United Nations has. Their guesses confirmed the anchor effect: the highest estimates came from people who had spun high numbers on the wheel.

Another Example

Researchers Russo and Shoemaker asked students in what year Attila the Hun suffered his crushing defeat in Europe. Just like the example with social security numbers, the participants were anchored – this time with the last few digits of their telephone number. The result? People with higher numbers chose later years and vice versa. (If you were wondering, Attila’s demise came about in 453.)

Yet Another Example

Students and professional real-estate agents were given a tour of a house and asked to estimate its value. Beforehand, they were informed about a (randomly generated) listed sales price. As might be expected, the anchor influenced the students: the higher this price, the higher they valued the property.

And the professionals? Did they value the house objectively? No, they were similarly influenced by the random anchor amount. The more uncertain the value of something – such as real estate, company stock or art – the more susceptible even experts are to anchors.

Anchors in our everyday life

Anchors abound, and we all clutch at them. The ‘recommended retail price’ printed on many products is nothing more than an anchor. Sales professionals know they must establish a price at an early stage – long before they have an offer. Also, it has been proven that if teachers know students’ past grades, it influences how they will mark new work. The most recent grades act as a starting point.

In my early years, I had a quick stint at a consulting firm. My boss was a pro when it came to using anchors. In his first conversation with any client, he made sure to fix an opening price, which, by the way, almost criminally exceeded our internal costs: ‘I’ll tell you this now so you’re not surprised when you receive the quote, Mr. So-and-So: we’ve just completed a similar project for one of your competitors and it was in the range of five million dollars.’ The anchor was dropped: the price negotiations started at exactly five million.

Next:
Induction – HOW TO RELIEVE PEOPLE OF THEIR MILLIONS

Similar Biases:
Framing – IT’S NOT WHAT YOU SAY, BUT HOW YOU SAY IT

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Gambler’s Fallacy – WHY THE ‘BALANCING FORCE OF THE UNIVERSE’ IS BALONEY

The above article is from the book The Art of Thinking Clearly by Rolf Dobelli. The article is only for educational and informative purposes to explain and understand cognitive biases. It is a great book, definitely worth a read!