Anchor Bias

Have you ever been shopping and saw an item on sale with a steep discount and thought “Wow, I can’t pass up this deal even though I may not have an immediate need for it”? Well, a clever marketing person that understands buyer psychology used your anchoring bias to affect your buying decision.

Psychologists have found that consumers rely heavily on the very first number they see. As a consumer, this can have a serious impact on the decisions that you make. From a seller’s perspective, this is a way to use the discounted price of a crossed-out list price, which is often higher and unrealistic, to trigger your cognitive bias, known more specifically as the anchoring bias or anchoring effect.

Human adaptation to make faster decisions leads us to compare two values. The first value we see is known as the anchor point. From there, we make a quick comparison to the next value. The difference or delta between these two values is mentally computed. When the second value is lower, such as with a discounted price, the brain sees the second value as more reasonable.

For example, if you were shopping for a flashlight and the first one you saw was priced at $200 and then you saw a second flashlight that costs $50, your anchoring bias would make you see the second flashlight as cheap. Whereas, if you’d seen the second flashlight at $50, you would recognize that a $50 flashlight is quite expensive since most can be had for between $15 and $20. What happened was that the anchor point of $200 unduly influenced your opinion on the price of the second flashlight at $50. This is also the reason that some restaurants offer several of their higher-priced menu items at the top of their menu at a ridiculously high price. While few people will buy these items, the purpose is that when the customer sees the hamburger and fries priced at $19, it seems like a good deal. This is known as decoy pricing.

In a 1974 study “Judgment Under Uncertainty: Heuristics And Biases,” Daniel Kahneman and Amos Tversky discovered that when a subject was presented with an initial value, even if the value was completely arbitrary, the participant in the study would make predictable incorrect estimations.

In one test, subjects spun a wheel with numbers ranging from 0 to 100. The subjects were then asked whether the percentage of African countries compared to the total number of U.N. Member States was higher or lower than the number on the wheel. What they discovered was that the anchoring value of the number on the wheel had a pronounced effect on the answers the subjects provided. When the wheel landed on 10, the average percentage provided by the subjects was that African countries made up 25% of U.N. Member States. When the wheel landed on 60, the average estimate was 45%. The random number generated from spinning the wheel had an “anchoring” effect, pulling subjects’ estimates closer to the number where the wheel stopped even though the number had zero correlation with the question. In each case, the test subjects were using that initial number as their anchor point to base their decision.

Used Car for sale with anchor price.
Photo by Hilbert Hill on Unsplash

However, the more relevant the items are the stronger the anchoring bias. So, if the anchor item is more similar to the target item, the consumer’s anchoring bias is stronger than if the anchor point is completely arbitrary. For example, let’s consider a negotiation for a car where the first number is based on a car of the same make and model. When the initial asking price for a used car is set at the start of negotiation and is based on the Kelly Blue Book for a low mileage vehicle with every available option and listed as being in excellent condition, this initial price sets the anchor point for all subsequent negotiations. As the price discussed during the negotiations is below the anchor point, it will seem more reasonable to the buyer, even if the anchor point price was much higher than the actual market value of the car.

Anchoring is more often apparent when consumers lack solid evidence or knowledge and if there is limited time to make a decision. Anchoring is notably prevalent when people are dealing with new concepts. The anchor point is also often the first price or the most recent piece of information received, which shades all decisions that follow. So, in the car example above, since the value of a car tends to be more subjective based on a variety of factors such as color, mileage, condition, etc., and when it is difficult for a person that buys a car only every few years to have a good handle on comparisons, the greater the effect the anchoring bias will have on the final negotiated price.

Anchoring bias creates an expectation and it does not only affect pricing. Imagine two couples go to a restaurant. One couple is told the wait for a table is 15 minutes and the other is told it will take 30 minutes. If after 25 minutes, the hostess tells the first party their table is ready, the couple will likely share their frustration that it took so long to get a table. In contrast, the second couple who had the expectation that it would be 30 minutes and it only took 25 minutes would head to their table pleased that their wait time was 5 minutes shorter than expected. This is why I always tell my clients to under-promise and over-deliver. Unfortunately, too many business people want the sale so bad and fear they will lose the prospect that they over promise and under deliver.

Keurig Coffee maker
Image Credit: Keurig

Sales represent one of the most common ways businesses leverage the anchoring bias to get a customer to buy. Kohl’s is one of the masters in using the anchoring bias to sell products and make consumers happy with the purchase. Some time ago, we were shopping for a Keurig coffee pot. The Keurig coffee maker had a list price of close to $200 but it was on sale for half the price. My wife was delighted and bought the coffee pot. Several days later at Walmart, I saw the same coffee pot with the everyday low price of $100. The fact is that the satisfaction that my wife felt by getting the coffee pot at half-price made her feel good about her purchase since the anchor price set the expectation that the pot was worth $200 but that she only had to pay $100.

The same thing happens with Black Friday sales. Although there are occasional loss leaders, much of the value that buyers perceive is based on little more than anchoring. Sales ads tell you what a new TV should cost and offer it to you at a steep discount. Of course, your mind takes a mental shortcut by taking them at their word about how much that TV was originally worth, creating the anchor point.

Since the anchoring bias occurs in so many situations, no one theory has fully explained why we are controlled by it. The most popular theory is that our anchoring bias stems from our tendency to look for confirmation of things we are unsure of. Even when a consumer is aware of the role an anchoring bias has on their decision-making process and even when they are reminded of this fact, the anchoring effect still affects their judgment. In the end, it just shows the power that the first piece of information has on how we make decisions in all facets of life.

How can you use your knowledge of anchoring bias in your business?