What is anchoring and how can it make you spend money?

Anchoring is a psychological heuristic that influences your ability to assess probability and make decisions. Anchoring is the common human tendency to rely on the first piece of information which is available to them, known as the anchor.

In more general terms, anchoring is the idea that we start with some information, a specific number for instance, and then work our way from there to make a decision.anchoring makes you spend money

Case study

Drazen Prelec and Dan Ariely conducted an experiment at MIT in 2006 where they had students bid on various items, such as a bottle of wine, a cordless trackball, and a textbook.

They had student write down the last two digits of their social security number, and had them pretend that this was the original price of the item. They then held an “auction” where they asked each student how much they would pay for each item.

For example, if the last two digits of their social security were “82”, the student would write down 82 on the top of their page, and then write $82 next to every item listed on the sheet of paper in front of them. Once this was done, the professors would describe each product, and the students would write down how much they bid on each item.

Remarkably, the students with the highest social security numbers (from 80-99) bid the highest amounts and those with the lowest (1-20) bid the least amount. As a matter of fact, those who had a social security number in the upper 20 percent bid 216 to 346 percent higher than those in the lowest 20 percent!

The crazy thing about this study is that the student did not believe writing down their social security number next to each individual item would affect their bidding. However, that number next to each item subconsciously made the students spend more (or less) than their peers depending on how high or low their social security number was.

What does this study prove?

We are affected by the first number that we see when it comes to making a decision. Although you can deny it all you want, anchoring is a common way that people make decisions, especially when it comes to making a purchase. The study above, along with many others, have shown that people use the initial number as a starting point and then work their way up or down from there.

Businesses use anchoring to make you buy more

How often have you bought a product because it was 50 percent off? Or how often have you bought something from the grocery store just because it was buy one get one free, even though you didn’t really need it? Did you ever stop to wonder why you bought that product?

Anchoring is the reason we buy products that are on sale and listed so cheaply. We have an initial number in our head, and we work our way from there to make decisions. If you don’t have a number already in your head, manufactures will certainly remind you what retail price is.

How can you avoid anchoring?

Unfortunately, studies have shown that it is almost impossible for us to avoid anchoring. They show that the moment we are presented with an anchor, our minds are contaminated and have a tendency to always go back to that number.

Take gas prices for example. Personally, my anchor for gas prices is around $2.30, which is the price gas was when I first started driving a car. It was the first number that I was familiar with when I had to first pay gas, and every time the price of gas goes up I think back to the days when it was only $2.30 a gallon.

If I can’t avoid anchoring, what can I do?

Anchoring is hard to avoid. The fact is, we do it on a daily basis. One way you can avoid anchoring through your purchases is the ask yourself: do I need this? Sure, it’s great to see something that is 50% off, but does that change the fact whether or not you really need that item? Probably not.

Ultimately, the best thing you can do is be more aware of anchoring and seeing how it effects you in your everyday life as a consumer. By understanding that you make irrational decisions due to anchoring, you will be more likely to make wiser decisions in the future.

What purchases have you made due to the anchoring effect? 

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