Anchoring bias is a cognitive bias that describes the tendency for people to rely too heavily on the first piece of information they receive when making subsequent judgments or decisions. The initial piece of information, or "anchor," serves as a reference point for all subsequent judgments or decisions, and may bias the final outcome towards that initial value.
For example, if someone is told that a particular product costs Rs.10,000, they may be more likely to perceive a similar product that costs Rs.8,000 as a good deal, even if the Rs.8,000 product is still overpriced. This bias can be observed in a wide range of contexts, from negotiation and pricing to decision making in general.
In his book "Thinking, Fast and Slow," Kahneman described an experiment he conducted on anchoring bias. A group of students were selected to be subjects in the experiment. The experiment used a rigged roulette wheel with only two possible outcomes, 10 or 65 and the students were asked to write down the number the wheel stopped at. If it stopped at 10, they wrote down the number 10, and if it stopped at 65, they wrote down that number.
Following this, the students were given two questions. Firstly, they were asked whether the percentage of African nations among UN members was larger or smaller than the number they had written down. Secondly, they were asked to estimate the actual percentage of African nations in the UN.
The first question served to establish the roulette number as the anchor , and the second question led them to making their estimate as an adjustment from the anchor. Lets examine the results of this experiment.
The average of estimates for the percentage of African nations in the UN were 25% and 45% for the two groups respectively, with the anchor point being the number at which the roulette wheel had stopped (10 and 65). The first question acted as the anchor point, which influenced the estimates given in response to the second question. Those for whom the roulette wheel stopped at 10, the anchor became 10. And when asked to estimate the percentage of African nations in the UN, without any conscious knowledge they adjusted from the anchor number of 10. On the other hand the participants whose anchor was 65, obviously knew that 65% sounded too high, and they adjusted downwards from 65% to the average of 45%. In each case the students made their estimates keeping as adjustments upwards or downwards from their anchor.
This experiment illustrates how we can be anchored by unrelated numbers, merely by being exposed to them prior to an estimate or negotiation on an unrelated matter. It is important to note that a roulette wheel cannot provide any meaningful information about the percentage of African nations in the UN or any other topic.
Anchoring as adjustment
The concept of anchoring as adjustment refers to the idea that people often make estimates or judgments by starting with an initial value, or anchor, and then adjusting that value based on additional information or factors. The initial anchor value can be arbitrary and have no real relevance to the judgment being made, yet it can still have a strong influence on the final judgment.
For example, in a negotiation setting, a seller may set an initial price for a product that is much higher than its actual value. The buyer may then start with this high price as their anchor and make adjustments based on their own perceptions of the product's value. However, even if the buyer is aware that the initial price is too high, they may still be influenced by it and make a final offer that is closer to the initial price than the actual value of the product.
An example of anchoring in everyday life could be when you are bargaining for a product, such as vegetables, with a seller. The seller may start with an initial asking price that is much higher (sometimes exorbitant) than the actual value of the product. This initial price can act as an anchor, and even if you know the actual value of the product, you may still end up negotiating based on the initial price offered and end up at a value much higher than the actual value of the product.
Suppose a seller quotes Rs. 100 for a Kg of potatoes. Despite knowing that the actual value is closer to Rs. 40, you may begin negotiations based on the quoted price. This initial asking price serves as an anchor, and despite your best efforts to negotiate, you're likely to end up paying much more than the actual value solely because you've been anchored to the initial price of Rs. 100
Role of priming in the Anchoring bias
Priming is the process by which exposure to a stimulus influences a person's response to a subsequent stimulus. In the context of anchoring, priming can be thought of as setting up the initial anchor in a person's mind.
For example, if someone is trying to sell a used car and initially quotes a high price, say Rs.15 lakhs, the potential buyer is primed to think of the car as a high-value item. This initial high price acts as the anchor. Even if the buyer knows that similar cars typically sell for s.7 lakhs, the high initial price may still influence their subsequent negotiations and they may end up paying more than they otherwise would have.
In the example of the roulette wheel the first question on whether the UN member African nations as a percentage of all United nations numbers was more or less than 10 or 65 set up the numbers 10 or 65 as the anchor. This process of setting up the anchor is priming. What is interesting is that prior to anyone being required to making a decision, judgement or negotiation, just about any reasonable number in the context can be primed to become an anchor.
In this way, priming plays a key role in anchoring bias by setting up an initial reference point that can bias subsequent judgments or decision
Countering or mitigating the anchoring bias:
To avoid falling prey to anchoring, it is important to do your research beforehand and have a clear idea of the actual value of the product.
Kahneman offers advice on how to counteract the anchoring bias in negotiations. He advises against responding to an outrageous proposal with an equally outrageous counteroffer, which would only create a significant gap in further negotiations. Instead, he suggests making a scene, storming out, or threatening to do so, to make it clear to both yourself and the other party that negotiations cannot continue with such an anchor on the table.
He also advises us to think about the opponent's minimal acceptable offer or the expenses the opponent will incur if no agreement is reached. This will diminish or even eliminate the anchoring effect .
As yet another strategy Kahneman cites Adam Galinsky and Thomas Mussweiler's approach to combating the anchoring effect during negotiations, which involves a more sophisticated strategy. According to the psychologists, negotiators should focus their attention and recall arguments against the anchor. By doing so, they activate System 2 thinking and can effectively resist the anchoring effect.
Overall, anchoring as adjustment demonstrates how an initial anchor value can have a powerful effect on subsequent judgments and estimates, even when it is arbitrary and has no real relevance to the judgment being made. To avoid the biasing effects of anchoring, it is important to consciously evaluate the anchor value and make independent adjustments based on relevant information or factors.
Lets now look at some examples of anchoring from various domains and varying situations
Pricing Strategy: A company launches a new product and initially sets a high price as the anchor. Even if they later reduce the price due to market feedback or competition, customers may still perceive it as expensive compared to the initial anchor price, affecting their purchasing decisions.
Salary Negotiations: During salary negotiations, the first offer made by either the employer or the job candidate can act as an anchor for the rest of the negotiation. For example, if an employer opens with a low salary offer, the candidate's subsequent counteroffer is likely to be influenced by that initial low anchor.
Product Value Perception: Companies often introduce higher-priced versions of their products to serve as anchors, even if they don't expect many customers to buy them. By presenting a premium option, customers may perceive the lower-priced options as more affordable or valuable in comparison.
Discounting Strategies: Retailers commonly use anchoring in their discounting strategies. By showing the original price of a product alongside the discounted price, customers perceive the discount as a great deal, even if the original price was inflated or not reflective of the product's value.
Negotiating Contracts: In contract negotiations between businesses, the first proposed terms can act as an anchor for subsequent discussions. For instance, if one party proposes an initial agreement heavily skewed in their favor, the other party may struggle to shift the terms in their direction due to the influence of the initial anchor.
Initial Public Offerings (IPOs): When a company goes public and conducts an IPO, the initial offering price establishes an anchor for the stock's perceived value. Subsequent trading may be influenced by that anchor, leading to rapid price changes or overvaluation if the anchor is set too high.
Grading Systems: In education, the grading system used by a school or teacher can act as an anchor for students' perceptions of their academic performance. For example, if a student consistently receives high grades initially, they may continue to expect and strive for those high grades, setting a high anchor for their academic self-perception.
Parental Expectations: Parents' initial expectations and standards for their children's academic performance and behavior can act as anchors. If parents set high expectations from the beginning, children may feel pressured to meet or exceed those standards, which can influence their motivation and self-esteem.
College Admissions: The college admissions process often involves anchoring effects. The reputation and ranking of colleges can act as anchors, shaping students' perceptions of which colleges are desirable or prestigious. The initial list of colleges a student considers may heavily influence their subsequent choices and decisions.
Teacher Bias: Anchoring can manifest in the classroom through teacher biases. When a teacher forms an initial impression or expectation about a student's abilities or behavior, that impression can act as an anchor, influencing subsequent interactions and assessments.
Parent-Child Negotiations: Anchoring can occur when parents negotiate rules, boundaries, or rewards with their children. For instance, if a child initially asks for a high number of privileges, such as extended screen time, the negotiation may center around finding a compromise between the initial anchor and the parents' desired limits.
Career Aspirations: The career aspirations and expectations that children are exposed to from an early age can act as anchors. If children are repeatedly exposed to certain professions or influenced by their parents' or teachers' expectations, they may develop fixed ideas about their future career paths, potentially limiting their exploration of other possibilities.
Sentencing: In criminal law, the initial sentence proposed by the prosecution or suggested by the judge can act as an anchor for subsequent discussions and negotiations. The initial proposed sentence often influences the final outcome, with both the defense and the prosecution using it as a reference point during plea bargaining or sentencing hearings.
Damages in Civil Cases: In civil law, the initial amount of damages claimed by the plaintiff or suggested by their legal representation can serve as an anchor for settlement negotiations or jury deliberations. The initial demand sets a reference point that influences subsequent offers, counteroffers, and assessments of what constitutes fair compensation.
Precedent: Legal precedent, particularly landmark cases, can act as an anchor for future legal decisions. When judges or legal professionals rely heavily on a specific past judgment as a reference point, it can shape their interpretation and application of the law in subsequent cases, even if the circumstances are different.
Settlement Offers: Anchoring effects can also be observed during settlement negotiations. The first settlement offer made by one party can significantly impact the direction and outcome of negotiations. Parties often use this initial offer as a reference point, and subsequent offers and counteroffers are influenced by it.
Legal Standards: Legal standards and thresholds, such as "beyond a reasonable doubt" in criminal cases or the "preponderance of evidence" in civil cases, can act as anchors in legal proceedings. These standards provide a reference point for judges, jurors, and legal professionals when assessing the strength of arguments and evidence.
Statutory Interpretation: Anchoring can occur when judges interpret statutes or legislative intent. The initial interpretation presented by one party or legal expert can influence subsequent discussions and the ultimate understanding of the law's scope and application.
