Have You Ever Been Anchored?

In the original economic theory it was assumed that people behave in a rational economic way. People look out for their best interest and try to build their own wealth in a logical rational way. However, behavioral financial theory suggests that this is simply not always true.

There are countless examples of ways that we don’t really think logically about our money. For example, studies have shown that if you simply ask people to write down the last two digits of their social security number then ask them to evaluate how much they would pay for something those that write down a larger number will say they will pay more. This effect is illogical and counter intuitive but the so called anchoring effect is a real bias that our minds are certainly susceptible to.

I discovered a version of this effect myself long before I new it existed. When I was in college I was in charge of fund raising for an honor society. We ran a little experiment during a bake sale. We figured out how much we felt was a fair price for every good. On one table we priced the goods with that amount. On a second table we priced the goods at twice that amount and then marked through the price and wrote in the price we’d originally decided on.

In other words if we felt a cupcake was worth 25 cents we priced them at 25 cents on table 1 and at table 2 we priced them at 50 cents and then marked through that price and wrote in 25 cents as if we’d cut the price in half.

What we discovered is that we sold out at the half price table in less than half the time. We then went to the original table and marked the goods the same way and quickly sold out there as well. Oh and I understand the irony of a honor society doing this, but it did work. This was, by far, the most successful bake sale we’d ever had.

Here’s the thing. There is no real way to totally defeat this type of effect. It’s nearly certain that at some point you’ve had your concept of the value of something anchored by some other number or price. It’s even likely that you’ve fallen prey to a discount or sale price that wasn’t really a sale price at all, but the price the seller actually wanted to get in the first place.

So what do you do about it? Well the first thing is to become aware of the effect. Only by becoming aware of it can you even have a hope of beginning to shift your mind against such an effect. You also need to spend time and energy to really investigate multiple numbers related to whatever you are interested in. There is some evidence that if you anchor your mind with many different numbers it keeps you from anchoring with any particular number. In other words when you want to avoid anchoring you need to expose your thinking to more numbers not fewer.

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