Chapter 11 of PSYCHOMarketing by Roger Nichols
The anchoring effect is one of the most dependable and tested phenomena in the world of experimental psychology. Daniel Kahneman and Amos
Tversky carried out a good number of experiments on the subject; you can find their fascinating conclusions in their book, Thinking, Fast and Slow.
Fundamentally, anchoring is a cognitive bias that is activated when we consider a particular value of an unknown quantity, before estimating that quantity’s value. That is, once we learn a value—either because we found it out ourselves or were told or shown it—the value we would estimate will always be relatively close to the value we were exposed to. The value we learned is called an anchor, because it strongly determines any estimate we would subsequently give.
Once the anchor has been established, we evaluate whether it’s high or low, and then we adjust our estimate to that amount. This mental process finishes early because we are not sure of the real amount, so our estimation is usually not far from the anchor.
This experiment proves that, cognitively, we have a huge tendency to use the small pieces of information that we are offered to establish decisions and estimates. For example, if someone asks you if
Gandhi was over 104 years old when he died and then asks you how old you think Gandhi was when he died, you will make a much higher estimate than if you had been asked, first, if Gandhi was over 44 years old when he died.
This is the same thought process you use when you estimate the price of something. You are influenced by the initial price asked, even if you think you’re one of those who feels others cannot easily influence you. A house will seem more valuable to you if it has established a high price than if it has a low one. By now, I’m pretty sure you’re tired of seeing images like this online.
The effects of anchoring are quite effective in marketing. The seller always makes the first move by fixing the price of a product or service and gains the advantage in the negotiation. This is because your estimate of the product value will be unconsciously anchored on the price they have set. From there, a discount or a much better offer is adapted to make purchasing the product hard to resist, even if the product remains expensive.
This effect is so strong that it can reach absurd limits. In fact, your judgment will be severely influenced by any number, even if it is not informative and has no relation to the amount you are estimating. In a disturbing experiment, judges were asked to establish a prison sentence for a woman who had committed a robbery. Before answering, loaded dice were thrown on the table so that the result was always going to be a three or a nine. The judges who got a response of “nine” proposed a sentence of eight months in prison, on average. The average sentence of the judges who got a “three” was five months of jail time.
Anchoring occurs when we rely heavily on previous information. That is, marketers compare what they initially know to present information. Consumers mostly use their prior information to make a value judgment about something that is close to the anchor they tend to buy, and those further away from the anchor they tend not to. All estimates and preferences for a product by consumers will be thought of as using the anchor as a focal point. Let’s say the value of an Apple iPhone is set to a price, and the price of the alternative brand offered (ACME phone) is lower than the Apple. The Apple may seem to be reasonable or even cheaper, even though the ACME phone price offered to the consumer is still higher than the real value.
How to avoid this bias? It is, frankly, difficult, if not impossible. In the case of a negotiation, you must focus on the minimum amount you think your opponent would accept, or on what it would mean for him or her not to reach an agreement at all. In all other situations, like when you are shopping, be aware of the anchor. Let’s say I want to sell you a sweater for $50, and I told you I bought it from the big box store for $30. You will likely not buy it. But what if I told you I paid $350 for it at a high-end boutique? Great deal then, right? Even though you will believe you are not affected by that great deal, you can remind yourself that kind of thinking will likely be deceiving yourself.
We should note that the anchor effect influences not only consumers but also manufacturers. Whether they agree or not that the anchor effect is subjective, it still has a significant influence on their production, even though the manufacturer may be very experienced.
Marketing Implications of Anchoring
The anchoring effect is useful in marketing because we generally don’t consider the value of products based on their intrinsic quality, but, rather, as based on the other offers available. Decisions are made through comparative analysis. A company provides potential customers with the option of going for a sponsored holiday either to Paris or Rome. Most people will have difficulty in deciding to select one of the two cities. However, if a third option, going to
Rome, is presented, but for this offer, the customer has to pay for morning coffee, most people will choose to go to Rome. They didn’t select Rome because they thought it was better than Paris, but because this third option was less appealing than the original offer and that became an anchor point.
Applying Anchoring
According to the anchor theory, when an anchor is set, consumers will, most of the time, adjust away from the set anchor in order to get their final answer. At times, they will move to a new anchor, which is closer to the first one. In line with this, marketers who want to sell their products for a particular price might start the bargain by giving a slightly higher rate than the intended amount, and then ask a consumer what he or she thinks about the price. Before the consumer responds, the marketer can say that, because he wants the consumer to be a regular buyer of his product, he will reduce the price (this is when the marketer should tell the consumer the intended price of the commodity). In this case, the consumer will most likely purchase that product, because most consumers decide whether the real value of a commodity is higher or less than the anchor presented to them. Unbeknownst to themselves, consumers tend to adjust from the anchor by producing a previous amount in their subconscious.
Next, they assess their thoughts, asking whether this generated value is reasonable or they should adjust their approximation once again.