--by Gene Benson
My neighbor recently needed to purchase a new laptop computer. He is not particularly techno-savvy and is operating on a very limited budget, so he asked his neighborhood nerd, that would be me, to give him some advice. Before I could respond, he pullout his phone and showed me an ad for a laptop priced at $149.00. It was obviously a very low-end machine, but I had no idea of his intended use. We spent a few minutes discussing his computing needs and I determined that this bargain machine would not provide satisfactory performance. I gave him my opinion of the minimum specs he should consider when shopping. Shortly, I received a text message that the lowest price he could find for a machine meeting those specs was priced at more than $400 and that was out of his budget range.
Frankly, I was amazed that he could find a laptop meeting the minimum specs for $400, but he was unhappy. The first price he had seen was $149 and that had become his anchor price. Anything more than that was now too expensive. I helped him find a refurbished unit from a reputable supplier meeting his specs for around $250 which made him feel better, but he was still unhappy that he had to pay more than $149.
The anchor effect is a powerful factor in our decision making. It is often discussed in terms of retail management but is at work in many of our decisions. Retailers almost universally put a “regular” price on an item that is well in excess of what they expect to be a realistic selling price. This is the first price that the shopper sees and it becomes the anchor price. The item is then sale priced at 40% off and seems like a bargain to the customer but is still priced to provide a nice margin for the retailer.
The concept applies to many other areas of our lives. We are wired to focus on the first bit of information we receive about a subject. Unless that information is blatantly and obviously incorrect, that becomes our anchor point on the subject. This includes information we receive from books, magazines, videos, television, radio, conversation with others, and of course the standard of truth otherwise known as the internet. Once the anchor point has been established all other information regarding the subject will revolve around the anchor point. And, other cognitive biases will work to support the anchor point information.
Allowing an anchor point to establish a false belief that a celebrity has been the victim of a horribly botched cosmetic surgery is relatively harmless for the average person. (I saw that recently as the headline of a tabloid in the grocery checkout line.) But an anchor point causing a doctor to pursue an incorrect diagnosis can lead to a poor outcome for the patient.
Our Being Better Program frequently works with people engaged in high-stakes operations in which allowing an anchor point to lead us into a flawed decision can be catastrophic. So how can we help to mitigate the negative effects of anchor points in decision making? The first step is to develop a good understanding of our heuristics and cognitive biases, including the anchor effect. The next step is the more difficult part. We need to engage in expertly guided exercises that help us identify and overcome the negative effects the specific biases. These scenario-based exercises demonstrate how biases such as the anchor effect work by allowing us to make flawed decisions and then carefully examining the cause of the flaw. With understanding and practice, we can up our game and make better decisions.