What is the Anchoring Effect?
The anchoring effect is a cognitive bias that influences how we make decisions based on the first piece of information we receive. This information, known as the anchor, serves as a reference point for our subsequent judgments, even if it is irrelevant or inaccurate. The anchoring effect can affect various aspects of our lives, such as how we negotiate prices, evaluate options, and estimate probabilities.
In this blog post, we will explore what the anchoring effect is, how it works, why it happens, and how to avoid it in our decision making.
How does the anchoring effect work?
The anchoring effect works by creating a mental shortcut that simplifies our decision making process. When we are faced with a complex or uncertain situation, we tend to rely on the first piece of information we encounter as a basis for comparison. This information becomes the anchor that influences our subsequent judgments and expectations.
For example, imagine you are shopping for a new laptop online. You see an advertisement for a laptop that costs $1,500, but it is marked down to $1,200. You might think that this is a good deal and be tempted to buy it. However, if you see another advertisement for a similar laptop that costs $900, you might change your mind and think that the first laptop is overpriced. In this scenario, the original price of $1,500 is the anchor that affects your perception of the value of the laptop.
The anchoring effect can also affect how we evaluate multiple options or alternatives. For example, imagine you are looking for a new apartment to rent. You visit three apartments that have different features and prices. The first apartment is spacious and modern, but it costs $2,000 per month. The second apartment is smaller and older, but it costs $1,500 per month. The third apartment is similar to the second one, but it costs $1,400 per month. You might think that the third apartment is the best option because it is cheaper than the other two. However, if you visit another apartment that is larger and newer than the first one, but it costs $1,800 per month, you might change your mind and think that the first apartment is the best option because it is more luxurious than the other three. In this scenario, the first apartment is the anchor that affects your evaluation of the other apartments.
The anchoring effect can also affect how we estimate probabilities or uncertainties. For example, imagine you are asked to guess how many people live in New York City. You might have no idea about the exact number, but you might recall hearing somewhere that it is around 8 million. You might use this number as an anchor and adjust your guess slightly up or down based on other factors. However, if you are asked to guess how many people live in Los Angeles instead, you might use the same anchor of 8 million and adjust your guess accordingly. This might lead you to underestimate the population of Los Angeles because it is actually around 4 million.
Why does the anchoring effect happen?
The anchoring effect happens because of several psychological factors that influence our decision making process. Some of these factors are:
- Availability heuristic: This is a mental shortcut that makes us rely on information that is easily accessible or memorable when making judgments. For example, if we hear a lot of news about shark attacks, we might overestimate the probability of being attacked by a shark when swimming in the ocean.
- Confirmation bias: This is a tendency to seek or interpret information that confirms our existing beliefs or expectations. For example, if we believe that a certain brand of products is superior to others, we might ignore or discount evidence that contradicts this belief.
- Framing effect: This is a phenomenon that occurs when different ways of presenting the same information affect our decisions or preferences. For example, if we are offered a product with a 90% success rate or a 10% failure rate,
we might prefer the former option even though they are mathematically equivalent. - Adjustment and anchoring heuristic: This is a mental shortcut that makes us adjust our estimates or judgments based on an initial value or anchor. For example, if we are asked to estimate how long it will take us to complete a task,
we might start with an anchor (such as our previous experience or an average time) and adjust it up or down based on other factors (such as difficulty or motivation).
How to avoid the anchoring effect?
The anchoring effect can have positive or negative consequences depending on the context and situation. Sometimes, using an anchor can help us make quick and reasonable decisions when we have limited