6 impacts of anchoring bias on mind and money

AncSix impacts of anchoring bias on mind and money

One hour. No, just 5 minutes. Please dad, 40 minutes. No, max 15 minutes more. This is a regular small stake negotiation between the father and the child at home for extra television time. The negotiation begins only when the agreed time is over. Which means, ideally there should not have been any negotiation. Ideally it should have been zero extra minutes but the child ends up winning most of the time, because the negotiation always starts with a large number. This number anchors father’s mind and his quick reactions.  

Anchoring bias is the impact on human behaviour after receiving the initial piece of information. Like in this case, the child says one hour and father’s thoughts get anchored around one hour. Instead of negotiating from zero to fifteen minutes, he actually negotiates from sixty minutes and brings it down to fifteen minutes. Obviously, this behaviour also covers father’s indulgence for the child. 

Anchoring is a concept explained by Amos Tversky and Daniel Kahneman in the book Thinking, Fast and Slow. In today’s Habits for Thinking, I am bringing your attention to how anchoring impacts our decision making. Viewing the screen for an extra few minutes is not a high stake decision but there are other decisions that have an anchoring effect and we need to be mindful about it. 

Here are six features and impact of the anchoring bias in our decision making.

Table of content:

  1. Anchoring as priming effect
  2. The anchoring index
  3. Anchoring is a marketing strength 
  4. Anchoring is used in policy making
  5. Anchoring is for focussing mind 
  6. Anchoring in wealth and investing

1. Anchoring as priming effect:

A textured premium paper box in navy blue with lettering in gold and a brown cardboard box with black lettering are identical in shape and size. Both of these boxes are shown to consumers and they are asked to estimate the price of face cream inside it. Unmistakably, consumers vote for the blue box with a higher price than the brown box. The packaging of the box is the anchor here that gives an initial piece of information to people. The packaging suggests that one in blue is more likely to be premium than the other one, even if the facecream is exactly the same inside the box.

This priming effect applies in our lives on a daily basis. Picking up a product from the shelf on the basis of packaging is just one of these decisions. The priming effect of anchoring also applies to first impression. This is the reason we dress up appropriately for an interview, which makes the first impression. 

2. The anchoring index:

“Powerful anchoring effects are found in decisions that people make about money, such as when they choose how much to contribute for a cause.” Quoted from the book, Thinking Fast and Slow. Research has shown during a donation drive, when the anchoring amount or the suggested amount was only Rs 1000, donations averaged around Rs. 500 but when the anchoring amount was made an extravagant Rs10,000 as suggested amount to be donated,  willingness to pay rose up to Rs. 5000 or more. 

Anchoring Daniel Kahneman

Kahneman writes, “a key finding of anchoring research is that anchors that are obviously random can be just as effective as potentially informative anchors.” Even a simple roll of dice with a number on it, can have an impact on the decision unrelated to the dice. The point to remember is that anchors do not have effects on people because they are informative. People just get carried away by the number. 

3. Anchoring is a marketing strength 

Discount on MRP of products work on the basis of anchoring. You like a jacket, you get it on a discounted price and you feel happy about the savings you have made from the anchor which is the original price of that jacket. In another instance of shopping, you end up buying an item because it shows ‘only one piece left’ in the ecommerce site. You click to buy even if the item is not an immediate need. This is priming of the anchor ‘one piece left’ which makes you take the quick decision. 

4. Anchoring is used in policy making

Traffic fine for drunk driving in Mumbai was Rs 2000 and for speeding Rs 400. In 2019, with the new policy change , drunk driving fine was made ‘Rs10,000 and/or 6 months prison’(or Rs.15,000 and/or 2 years jail for repetitive violation) plus for speeding it ranged between Rs 1000-4000 + licence seizure in certain conditions. In 2019, when the policy was redesigned the fines were not only increased for these two offences, but also for other offences like overloading of a vehicle, obstructing the path of an emergency vehicle etc. 

According to a report, approximately 2348 road accidents were reported in Mumbai between January-October in 2019. A dip of about 18% had been noticed in road accidents in comparison with 2018 (January-October) when the total number stood at 2619. The decline in the numbers of road mishaps can be partially attributed to the Motor Vehicles (Amendment) Act 2019. 

Speeding and drunk driving fines work as anchors for policy making in other areas too. This large fine has an impact on the overall behaviour of drivers thus reducing the accident rate. Anchors are used in policy making to have a large umbrella impact on other aspects of the policy too. 

5. Anchoring is for focussing mind 

In sports psychology, athletes are trained to have winning mindsets. To enter this winning mindset just before a competition, they get into a ritual designed well in advance. This ritual works as an anchor, almost like a switch on button to enter a winning mindset. Like, see this “Micahel Phelps dynamic stretch arm swing on the block. Not only did it tell Michael that he was ready to pounce on the competition, the loud slap on his shoulders of his hands also anchored to every one of his competitors that Michael was ready.”

6. Anchoring regarding money and wealth: 

In our own life, the anchor effect plays a role in many thinking processes. Here is a quote: 

Anchoring to a number is the reason people do not react to their total wealth, but rather to differences of wealth from whatever number they are currently anchored to. This is in major conflict with economic theory, as according to economists, someone with $1 million in the bank would be more satisfied than if he had $500 thousand but this is not necessarily the case. ”

Nassim Nicholas Taleb, Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets

Anchoring bias in trading and investing is a common behaviour. Like anchor effects in other areas, anchoring bias in trading is similar. Suppose a buyer wanted to buy a stock at Rs70, but he didn’t buy it then and now the stock price is Rs110. The buyer feels that the stock will go higher after studying the company’s reports but he is still dilly-dallying to buy the stock at Rs110 as he is facing an anchor of Rs 70. A similar bias plays in while selling stocks. An anchor effect of a higher price makes the person hold the selling decision.  

Money led transactions like selling of an old car, buying of a house, buying and selling of companies in businesses can be influenced by anchoring bias. Negotiations, business dealings are a lot more dependent on anchoring. It becomes important to who begins first. As mentioned earlier, the mind has two systems, one that reacts immediately, and the other that thinks, weighs the details and then reacts. To counter the adverse effects, it is important to train the mind to think the opposite. It helps in avoiding decisions that get influenced by anchoring bias. 

As a conclusion, here is an excerpt from Kahneman: 

You are always aware of the anchor and even pay attention to it, but you do not know how it guides and constrains your thinking, because you cannot imagine how you would have thought if the anchor had been different. However, you should assume that any number that is on the table has had an anchoring effect on you and if the stakes are high you should mobilize your thinking. 

Babies are great negotiators, they get their way. But to avoid anchoring bias, grown ups have to behave in a conscious manner and apply thinking. 

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