The first one is to make the product artificially high, but have frequent ‘discounts’. There are a number of key techniques that are used to take advantage of the anchoring bias. MarketingĪnchoring bias in marketing and advertising is a key tool used to increase sales. This is because this is set as the anchor by which all other cars are compared to. A $20,000 initial price point for the ‘anchor’ car will reduce the willingness to pay. By contrast, showing the customer the cheapest car as they come in may suggest that they are affordable. In turn, the higher price point of the anchor will tend to increase the willingness to pay. Every other car is going to seem cheaper in comparison. Way out of their price range, but the anchor is placed. When the customer walks in, they may see a luxury car priced at $40,000. That way, not only are customers drawn in, but they see the highest price points first. One common method showroom’s use to encourage buyers is to put the most expensive and attractive cars at the front. Therefore, the main conclusion to be made is that even though other information is available, judges, as well as others, are susceptible to anchoring. The research also found that even more experienced judges were susceptible to anchoring bias. In fact, a paper by Eyal Peer & Eyal Gamliel found that judges were susceptible to recommended or demanded sentences suggested by the prosecutor.įurther research by Birte Englich and Thomas Mussweiler shows that when presented with unrealistically high sentencing options, it led them to give longer sentences. When an initial demand or recommended sentence is suggested, it has an impact on the judge’s final verdict. The reason is linked back to anchoring bias. These can differentiate by years or millions of dollars. Often, we see judges award different sentences for almost identical crimes. ‘That’s an excellent deal, it’s a bit out of my price range, but I can’t miss out on this offer’, the customer replies.Īs the customer anchored their price expectation of the car at $22,000, anything underneath that seems like an excellent deal. The salesman then says ‘We can do a deal especially for you, we can go down to $19,000 if you buy today’. However, at the same time, the customer has anchored their valuation of the car to $22,000. The customer hears the $22,000 price and thinks ‘oh, that’s way out of my price range’. After discussing the details of the car, the salesman makes an offer to the customer of $22,000. The customer comes in and decides they like the car and is willing to pay up to $15,000. He is trying to sell a Ford Focus for $20,000. Higher first offers are more likely to lead in higher sale prices than lower first offers. In other words, the first offer sets the ground for reasonable negotiation. The research states that in situations of great ambiguity and uncertainty, first, offers have a strong anchoring effect-they exert a strong pull throughout the rest of the negotiation. However, it has been proven that this can in fact skews the negotiation. Often, we tend to wait for the other party to make the first offer. In fact, research from Harvard University demonstrates the significant effects it can on negotiations. Negotiations are a classic example of anchoring bias.
He simply doesn’t want to be influenced by it and instead comes to an unbiased valuation. It is for this reason that Warren Buffett ignores the share price and instead looks purely at the fundamentals. When analyzing the true value of a company, a low current stock price leads to lower valuations, whilst high stock prices lead to the opposite.
The current stock price will affect investors’ valuation of the stock. So their expectations are intrinsically linked to the initial value they see. The stock price is the first thing they see before fundamentals such as historical profitability or revenue growth. There is a tendency for investors to ‘anchor’ their valuation to the stock price. Even though we may have a suitable level of detail to make an informed decision, the ‘anchor’ can have an overwhelming effect on our decision. However, the effect can also occur when information is more available. We use such information to make what our minds think is a logical estimate based on limited information. When we make a decision, particularly without prior evidence, we often assign a strong level of significance to the first piece of information we see. However, it can, in fact, have the opposite effect. Anchoring Bias ExplainedĪnchoring bias is used in order to come to a more logical decision. Anchoring occurs to reduce the amount of cognitive load placed on our brains.This may be the first piece of information in a sequence.Anchoring bias occurs when one piece of information is given greater importance than others.
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