Yes, I know that’s not the proper spelling. Nautically speaking, the term for raising an anchor on a ship is “anchors aweigh.”
But today’s column is about how to free yourself from a certain quirk of thinking called “anchoring” so you can avoid its effects when it really matters.
Imagine you’re out for a very nice dinner with your spouse and the two of you decide to share a bottle of wine. You look at the wine list and see several bottles listed in the $170 range, a few in the $50 range and quite a number around $80 to $90.
While $80 is more than you were planning to spend when you left the house, you’re still drawn to the $87 bottle of cabernet.
Because $50 – being the lowest price – seems miserly for a special evening out… and compared with the $170 price tag, $87 is easier to accept.
This is an example of anchoring.
The $170 bottles shifted your expectations for what a nice bottle of wine should cost. If the highest-priced bottles were all in the $80 to $90 range, you probably would’ve chosen a less expensive option.
But this is just one instance of anchoring in action…
Another example of anchoring is called “rationing.” This happens when you’re told that there’s a limited supply of something.
In one experiment at a supermarket, Campbell Soup was put on sale for 10% off. When a sign was added that read “Limit 12 cans per person,” people bought an average of seven cans. This was twice as many as when there was no limit. The anchor of 12 cans drew people to purchase more than the three to four cans they would have typically bought.
If you look for it, you’ll see this technique everywhere in marketing…
In most cases, it’s relatively harmless. It will draw you in to buy something that’s a few dollars more than some other product… or to buy a higher-than-usual quantity of something you would likely use anyway. But as we’ll see, awareness of this technique when you’re facing higher-cost items (like a car or a home) can save you a lot of money.
When Adaptability Can Hurt Us
Something to understand about anchoring is that there isn’t anything rational about it. It doesn’t matter whether the figure used to anchor is well thought out or chosen at random. In fact, Daniel Kahneman and Amos Tversky used a wheel of fortune to generate either a higher or a lower anchor in one of their experiments.
When I was in elementary school, my favorite field trip was to the Exploratorium in San Francisco. If you’ve ever visited, you know they have lots of fun, hands-on experiments that provide a direct experience of interesting phenomena.
Like how our hearing perception adapts so that we can understand words that sound like nonsense – as long as they sound close enough to real words. They also offer different experiments with magnetism, optical illusions, and other fascinating and quirky things to play with.
In one of these exhibits, some participants were asked these two questions: Is the height of the tallest redwood tree more or less than 1,200 feet? What is your best guess about the height of the tallest redwood?
Here, the redwood height was anchored at 1,200 feet. Other participants were asked the same question, but with the anchor height at 180 feet.
I think you can probably sense which group guessed a higher or lower height for the tallest redwood.
On average, those given 1,200 feet as the anchor estimated that the tallest redwood was 844 feet. Those given the anchor height of 180 feet guessed an average of 282 feet.
By weighing the difference in guesses against the difference in anchors, we find the overall anchoring difference to be 55%. That may seem extreme, but it’s actually a fairly consistent effect of anchoring.
That means awareness of anchoring during a negotiation could potentially save you a similar percentage of money.
Anchoring Your Finances
The key when entering a single-issue negotiation is to make the first move. You establish the anchor at whatever price you state, which puts you in the stronger position.
But if you’re negotiating the price of a car or home and the seller starts at a ridiculously high price, that’s going to draw you to have a higher figure in your own mind. Because of that, you may end up spending thousands, tens of thousands, even hundreds of thousands more than you would have.
This could seriously impact your quality of life.
If you’re faced with a situation where the seller begins with an outrageously high price, Kahneman suggests making a scene and storming out, refusing to accept that figure as a possibility.
Then you can come back and start fresh, with that anchor effectively erased from the negotiation and freeing yourself from it internally as well.
As with all biases, anchoring is rooted in mental processes that work well most of the time. There’s nothing to be self-critical about here.
But be aware of this bias and consciously free yourself of it when it really matters. It could make a significant difference in your bank account totals – providing you with more money to invest.