Anchoring Effects

Anchoring effects were one of the psychological phenomenon that I found the most interesting in Daniel Kahneman’s book Thinking Fast and Slow. In many situations in our lives, random numbers seem to be able to influence other numbers that we consciously think about, even when there is no reasonable connection between the random number we see, and the numbers we consciously use for another purpose. As Kahneman writes about anchoring effects, “It occurs when people consider a particular value for an unknown quantity before estimating that quantity.”

 

Several examples of anchoring effects are given in the book. In one instance, judges were asked to assess how much a night club should be fined for playing loud music long after the quite orders in the night club’s local town. Real life judges who have to make these legal decisions were presented with the name of the club and information about the violation of the noise ordinance. The fictitious club was named after the fictitious street that it was located along. In some instanced, the club name was something along the lines of 1500 First Street, and in other instances the club name was something like 10 First Street. Judges consistently assessed a higher fine to the club with the name 1500 First Street than the club with the name 10 First Street. Seemingly random and unimportant information, the numbers for the street address in the name of the club, had a real impact on the amount that judges on average thought the club should be fined.

 

In other examples of anchoring effects, Kahneman shows us that we come up with different guesses of how old Gandhi was when he died if we are asked if he was older than 35 or younger than 114. In another experiment, a random wheel spin influenced the guess people offered for the number of African nations in the UN. In all these examples, when we have to think of a number that we don’t know or that we can apply subjective judgment to, other random numbers can influence what numbers come to mind.

 

This can have real consequences in our lives when we are looking to buy something or make a donation or investment. Retailers may present us with high anchors in an effort to prime us to be willing to accept a higher price than we would otherwise pay for an item. If you walk into a sunglass shop and see two prominently displayed sunglasses with very high prices, you might not be as surprised by the high prices listed on other sunglasses, and might even consider slightly lower prices on other sunglasses as a good deal.

 

It is probably safe to say that sales prices in stores, credit card interest rates, and investment management fees are carefully crafted with anchoring effects in mind. Retailers want you to believe that a high price on an item is a fair price, and could be higher if they were not willing to offer you a deal. Credit card companies and investment brokers want you to believe the interest rates and management fees they charge are small, and might try to prime you with large numbers relative to the rates they quote you. We probably can’t completely overcome the power of anchoring effects, but if we know what to look for, we might be better at taking a step back and analyzing the rates and costs a little more objectively. If nothing else, we can pause and doubt ourselves a little more when we are sure we have found a great deal on a new purchase or investment.

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