Anchoring Effect
The Misconception: You rationally analyze all factors before making a choice or determining value.
The Truth: Your first perception lingers in your mind, affecting later perceptions and decisions.
You walk into a clothing store and see what is probably the most bad ass leather jacket you’ve ever seen.
You try it on, look in the mirror and decide you must have it. While wearing this item, you imagine onlookers will clutch their chests and gasp every time you walk into a room or cross a street. You lift the sleeve to check the price – $1,000.
Well, that’s that, you think. You start to head back to the hanger when a salesperson stops you.
“You like it?”
“I love it, but it’s just too much.”
“No, that jacket is on sale right now for $400.”
It’s expensive, and you don’t need it really, but $600 off the price seems like a great deal for a coat which will increase your cool by a factor of 11.
You put it on the card, unaware you’ve been tricked by the oldest retail con in the business.
One of my first jobs was selling leather coats, and I depended on the anchoring effect to earn commission. Each time, I figured it was obvious to customers the company I worked for marked up the prices to unrealistic extremes. Yet, over and over, when people heard the sale price, they smiled and wrestled with their better judgment.
The prices you expect to pay, where did those expectations originate?
To figure out how those channels were dug, those paths were beaten, answer this:
Source: WorldTravels.com
Is the population of Venezuela greater or fewer than 65 million?
Go ahead and guess.
Ok, another question, how many people do you think live Venezuela?
Come up with a figure and keep it in your head. We’ll come back to this in a few paragraphs.
In 1974, Amos Tversky and Daniel Kahneman conducted a study asking a similar question.
They asked people to estimate how many African countries were part of the United Nations, but first they spun a wheel of fortune.
The wheel was painted with numbers from 0 to 100, but rigged to always land on 10 or 65. When the arrow stopped spinning, they asked the person in the experiment to say if they believed the percentage of countries was higher or lower than the number on the wheel.
They then asked people to estimate what they thought the actual percentage of nations was.
They found people who landed on 10 in the first half of the experiment guessed around 25 percent of Africa was part of the U.N. Those who landed on 65 said around 45 percent.
They had been locked in place by the anchoring effect.
The trick here is no one really knew what the answer was. They had to guess, yet it didn’t feel like a guess. As far as they knew, the wheel was a random number generator, but it produced something concrete to work from.
When they adjusted their estimates, they couldn’t avoid the anchor.
The populations of South American countries probably aren’t numbers you have memorized. You need some sort of cue, a point of reference.
You searched your mental assets for something of value concerning Venezuela – the flag, the language, Hugo Chavez – but the population figures aren’t in your head.
What is in your head is the figure I gave you, 65 million, and it’s right there up front influencing how you answer the second question. When you have nothing else to go on, you fixate on the information at hand.
The population of Venezuela is 28 million people. How far away was your answer?
If you are like most people you assumed something much higher.
The numbers generated by the wheel of fortune, the number I gave you and the $1,000 price tag are all anchors, unwanted guests in the mind which change the mood of the party.
Anchors can make big numbers seem small, throw estimates out of whack and lead you into decisions which, in the long view, seem silly.
In many situations, people make estimates by starting from an initial value that is adjusted to yield the final answer. The initial value, or starting point, may be suggested by the formulation of the problem, or it may be the result of partial computation. In either case, adjustments are typically insufficient…that is, different starting points yield different estimates, which are biased toward the initial values.
- “Judgment Under Uncertainty” by Kahneman, Slovic and Tversky
You depend on anchoring every day to predict the outcome of events, to estimate how much time something will take or how much money something will cost.
When you need to choose between options, or estimate a value, you need footing to stand on.
How much should you be paying for cable? How much should your electricity bill be each month? What is a good price for rent in this neighborhood?
You need an anchor from which to compare, and when someone is trying to sell you something they are more than happy to provide one. The problem is, even when you know this, you can’t ignore it.
When shopping for a car, you know it isn’t a completely honest transaction. The real price is probably lower than what they are asking for on the window sticker, yet the anchor price is still going to affect your decision.
As you look over the vehicle, you don’t consider how many factories the company owns, how many employees they pay. You don’t pore over engineering diagrams or profit reports. You don’t consider the price of iron or the expensive investments the manufacturer is making into safety testing.
The price you are willing to pay has little to do with these considerations because they are as far from you at the point of purchase as the population of Venezuela.
Even if you’ve done some research online, you don’t know for sure exactly what the car is worth, or what the dealer paid for it. The focus instead is the manufacturer’s suggested retail price, and no matter how unrealistic it is, you can’t help but be tethered to it.
When you haggle over the price, you are pulling away from the anchor, and both you and the dealer know this.
The anchoring effect can also slip in unannounced.
Drazen Prelec and Dan Ariely conducted an experiment at MIT in 2006 where they had students bid on items in a bizarre auction.
The researchers would hold up a bottle of wine, or a textbook, or a cordless trackball and then describe in detail how awesome it was.
Then, each student had to write down the last two digits of their social security number as if it was the price of the item. If the last two digits were 11, then the bottle of wine was priced at $11. If the two numbers were 88, the cordless trackball was $88.
After they wrote down the pretend price, they bid.
Sure enough, the anchoring effect scrambled their ability to judge the value of the items.
People with high social security numbers paid up to 346 percent more than those with low numbers.
People with numbers from 80 to 99 paid on average $26 for the trackball, while those with 00 to 19 paid around $9.
Social security numbers were the anchor in this experiment only because we requested them. We could have just as well asked for the current temperature or the manufacturer’s suggested retail price. Any question, in fact, would have created the anchor. Does that seem rational? Of course not.
- Dan Ariely from his book, “Predictably Irrational”
The auction experimenters conducted another study in which they asked people to listen to annoying sounds for money. The researchers initially offered either 90 cents or 10 cents for a blast of awful electronic screaming, and then they asked the subjects how much would be the lowest possible price they would need to be paid to listen to the sound again.
People who were offered 10 cents said it would take about 33 cents to continue. People offered 90 said it would take 73.
They repeated the experiment in other ways, but no matter how they messed with the sounds or the payouts, those who were first offered a low payment consistently agreed to lower amounts than those used to better wages. People who got more money at first were unwilling to accept lower payments later.
If you move up to a nice car or a big house, a nice computer or an expensive smartphone, you become anchored and find it difficult to back move down later, even if you should.
Those who buy expensive purses know they are being hornswoggled, at least at some level, yet the anchoring effect still reaches into their bank account.
Source: sybarites.com
Does a $800 Louis Vuitton purse function better than a $25 handbag from Wal-Mart? No, not even if it was hand made from giraffe leather and stitched by real, magical leprechauns. It’s just a purse.
But the anchor is set. Louis Vuitton bags are expensive, and that in itself has social value. People still buy them and are happy with their purchase.
If Wal-Mart offered a purse at $800 it would live out its life on the shelf. The price would be so far from the anchors already set by the store it would seem like a bad deal.
Like most psychological phenomenon, anchoring can be used to manipulate people to do good. The best example is the door-in-the-face technique.
In a 1975 study by Catalan, Lewis, Vincent and Wheeler, researchers asked a group of students to volunteer as camp counselors two hours per week for two years.
They all said no.
The researchers followed up by asking if they would volunteer to supervise a single two-hour trip.
Half said yes.
Without first asking for the two-year commitment, only 17 percent agreed.
Remember this study if you are ever in a negotiation - make your initial request far too high.
You have to start somewhere, and your initial decision or calculation greatly influences all the choices which follow, cascading out, each tethered to the anchors set before.
Many of the choices you make every day are reruns of past decisions, like channels dug into a dirt road by a wagon train of selections, you follow the path created by your former self.
External anchors, like prices before a sale or ridiculous requests, are obvious enough you can sidestep the actual price, the real appeal. Internal, self-generated anchors, are not so easy to bypass.
You visit the same circuit of websites everyday, eat basically the same few breakfasts.
When it comes time to buy new cat food or take your car in for repairs, you have old favorites.
Come election time, you pretty much already know who will and will not get your vote.
These choices, so predictable, ask yourself what drives them. Are old anchors controlling your current decisions?
When you are parting with your money, know the person on the other side of the deal thinks you are not so smart and is depending on the anchoring effect when they tell you how much you are about to save.
If you buy one book this year…well, I suppose you should get something you’ve had your eye on for a while. But, if you buy two or more books this year, might I recommend one of them be a celebration of self delusion? Give the gift of humility (to yourself or someone else you love). Watch the trailer.
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Very interesting article despite the fact that I’ve already read Predictably Irrational and knew about that study. Perhaps because I’ve read that book I’m less susceptible to the anchor effect as I guessed 25 million for the population of Venezuela. I wonder if my thought process has changed since reading that book or if I’d have done the same thing regardless. Or maybe it was just that I knew that Venezuala couldn’t possibly that big and the US population is 300 million so it was a more educated guess which eliminated the anchor effect.
I guessed 25 million also, though i havent heard of this study before. exremely intriguing though :)
I guessed 20. Although close, perhaps you and Emanuel were anchored to the “5″ beside the six. :P
This might be an urban legend, but supposedly this is how the US Constitution was written. Madison showed up at the meeting with a rough draft – so rather than writing something new, everyone focused on editing his document.
I’m not certain if that’s an example of the anchoring effect, or human laziness, or just that large parts of the Constitution were pretty well agreed on ahead of time, but it certainly bears a lot of resemblance. I know from experience that it’s a great tactic for working in a committee.
Awesome observation
I guessed 10 million for the population of Venezuela. What does that mean? An anchor effect in reverse? I knew 65 million was too big and so figured I should guess on the small side to be sure I wasn’t being tricked
It could be that you knew he was testing the anchoring effect (since that’s what the article is about) and you purposely guessed lower to avoid being tricked, or you are naturally a cheap person. I don’t know how to word that better. I also guessed 10 million. I’m really cheap; when I go grocery shopping, I only buy items that are marked 50% off because they are close to the expiry date. I guess I was also “cheap” when it came to guessing the population.
I also guessed 10 million. I was trying to make an educated guess based on the size and terrain of the country (I was guessing that a lot of the country is jungle). Not sure what this means.
I’m with Adrian. I guessed 20 million. Possibly a reverse effect? 65 is way too large, so I worked up from the bottom?
I dunno.
I think that people who are interested in this subject (such as the readers of this article) are not the unbiased test subjects. We know we are going to be reading about the anchor effect, so when I saw the questions I thought: I am not gonna fall for this trick! The number is probably just 10 million!
This was my first read on this website – I guessed 55 million. I think your take is accurate.
Yeah, my first read too, and i knew the US has 300 million and Venezuela is much smaller. But i figured the trick was trying to get me away from the number so i guessed it reasonable to be 65 million, the anchor.
I actually guessed the population spot on!
Now, to figure how I can make money from this new found talent…
I actually WAS high, but by only 2 million – 30 million seemed reasonable. That’s pretty close for an uninformed guess.
Of course, I always cringe when my wife tells me she just bought an $x item for $y.
somehow i think that yogis or sufis or anybody who knows the self as separate from the mind will have a different reality
While there obviously is an effect (the social security example…) many of the experiments are tainted by there being another person involved in the ‘bargaining’. If you WANT a leather jacket, or a new car, or whatever, and the only people who have them are selling them for outrageous prices, then that’s what you’ll have to pay, whether they’re ‘worth’ that much or not.
The sound and volunteering experiments are similar. In both cases, the participants had other motivations – in the sound experiment, they wanted to get paid *something*, and given an example of what the experimenter thought was reasonable, came up with a number they thought (subliminally) both could agree upon. In the volunteer experiment, they wanted to please the instructor – and needed to calibrate how much effort it would take to do so.
I almost wonder if the completely random social security anchoring effect is actually a side effect of this desire to compromise being unconsciously applied to inappropriate situations.
There seems to be more going on here than a ‘simple’ priming effect.
I did actually guess higher for Venezuela! 80m! Maybe that’s because I live in Australia, which is very sparsely populated, and I figured Venezuela would have a few heaving South American metropoli.
I went for a job a couple of years ago which I didn’t really want (well, it was second choice), and so I asked for what I thought was an absurd salary for the position. I got offered something not far off absurd, but stuck with what I really wanted to do in the end. Still, next time I go for a job…
I guessed 30 million based on the population of the United States being about 300 million. I figured Venezuela is a small country in comparison, and 10% of the US seemed about right. Emanual, the first poster here, did roughly the same thing. We weren’t anchored to the 65 million starting number, but we were anchored to another number we knew, the population of the United States.
And like Emanual, I too have read Predictable Irrational. It’s a terrific book that greatly expands on this article. If this is a topic that interests you, pick up the book.
I guessed 10 million because most countries in South America are typical less populated. I’ll admit I was way off but still not influenced. While I agree with this in principle, I think you over-simplified the Louis Vuitton/Wal-Mart example. You should’ve used 2 items that were ‘equal’. Its like saying that a Toyota Corolla should fetch the same amount as a Ferrari because they are both cars.
Maybe I should have picked a more obscure country, like Belarus. Oh well. I am not so smart…
In the beginning of the article you gave an example of an expensive leather jacket that you wanted to purchase. I think the principle of your article is a lot more accurate when it comes to financial transactions. Sure, I am affected by you writing “65 million” before telling me, and a spinning number wheel would probably sway me towards a certain number. But if I have to pay for it with my hard earned cash, now you will see the real effect.
I think this sentence is spot on when it comes to money: “People who got more money at first were unwilling to accept lower payments later.”
You will never go back to that store and buy a leather jacket from them for more than $400.
If you wrote another article and told me 10 million people I would probably guess much lower. But if those were dollar figures I would never go below $65 million again.
@John – Great comment. Cash does change the way people think about everything. I think that might be a future post – money.
cee beat me to the punch. I fully agree.
For example, I’m quite aware a can of beans that is marked down by 33% was probably overpriced to begin with. But, that original price is the going rate in the supermarket world of beans, give or take a few cents. There’s no point in loftily declaring “they’ll not trick me with their anchor price shenanigans!” Without drifting in accusations of a Great Bean Price Fixing Conspiracy, that is the going rate of beans. So, 33% off is the best I’m going to do this shopping trip.
On another note, this anchor price retail world is why I loathe haggling. My brother-in-law lives to dicker, haggle and bargain. He’d haggle for the price of a Happy Meal at McDonalds.
I assume this is why jewelry stores always have “sales” of huge percentages off the original price, but then add fine print about “actual sales may not have occurred at original price.” That’s about as close to “we blatantly made up these numbers so you’d pay more” as they can get.
Mel V, bringing a written version of a to-be-drafted document to a committee meeting is a nice quick way to ensure your voice gets heard more than anyone else’s! It does work, and it usually saves time. If you’re like me and you’re likely to be the one guiding the meeting anyway, it saves a lot of painful back-and-forth. People who just want to argue can still pick a point and argue, but they don’t have to do it for every point . . .
Many years ago I worked a Summer job at William Baird Group (now just Baird Group). At the time they sold Nautica clothing across Europe.
I was told not to worry about stock damage because the MOST expensive item to produce was in the region of £30 ($46). At the time, the cheapest item of clothing they sold was a £60 ($94) T-Shirt, which incidentally cost around $1 to produce.
I got a valuable life lesson there and have not paid full price for anything since.
Oddly, I guessed 10 million as well. So I am with Adrian and Co. I was looking for the ‘trick’ and guessed the number must be very low. Is that a particular “effect”?
I guessed a billion! HAHAHAHA! Everyone read my comment and think about me so I will have popularity on the interwebs!!!
All that aside, this was very informative and explained something about human nature that everybody should be aware of.
I guessed 25 million too. I rationalized the number based on how many people are in the US though. Even while trying to figure it out, I felt the pull of the anchor number. This was an awesome article, and I plan on sending it to a few people. Especially my mother in law who loves expensive purses! She gets so excited when they’re on sale even if the sale price is still exorbitant.
It even happened with a car we just sold! My husband wanted to list it for far less (what we actually thought it was worth) and I wanted to list it high and let the people talk us down. I won that argument, and we got a lot more money for the car! From not on, I’m going to make a conscious effort to rationalize the numbers and disregard the anchor price, but since I’m not so smart, I’m not sure if I’ll remember to do that. I hope I don’t fall into old patterns!
You need to provide a way to overcome the things you write about! haha
Maybe the anchor effect, like most things, stops working when overstretched. So the 65 million for Venezuela was way off … I’m from Germany, which has a bit over 80 million, so there is no frickin’ way Venezuela has almost as many. I came in at 20 million too. OTOH. I don’t know what I would have said otherwise. Maybe it would have been lower, so there would have been some residual effect.
The really stunning thing is that the anchor effect still works with the $1000 leather coat and the $800 handbag, even though the “natural” price (if there is such a thing) is an even tinier fraction of the anchor than the real population of Venezuela!
For those of you who guessed very low. Did you know there was something fishy about this article? Judging by the title, I knew it had something to do with basing one thing attached to another. You might have known that as well and tried to not fall into the trap. The people who took the initial test were plainly asked the question, not knowing the background of the test. For the record, I guessed 40 mill, based on thinking Venezuela was bigger than Canada. I was wrong. Bare in mind, if the figure was 15 mill, I would have guessed 25 mill. I fell for it!
Same goes with politics. A horrible democrat can make a bad republican look good, and visa versa. Voting the “lesser of evils” simply leaves you with a warm fuzzy feeling but you may not have a good deal in the end.
I found this true when I worked at a furniture store. We sold “imported” furniture that were replicas of antique European furniture. The manufacturing cost was between $1 and $50 for any 1 item, all of it was shipped to the US for about $1000, with 2500+ pieces (mostly smaller items), and when it got to the store the store “price” was between $3 and $2000, to then up the price to $25 for a small 5cm tall ceramic figure to $5000 to $10,000 on the high end. Damaged items were removed and no major worries ensued. We were only allowed 5% margin difference to push the sale and grab a small commission.
Since then I moved to another city and find the same exact products going for 2-3 times as much.
The only thing you are paying for when buying expensive things is the name. People who buy name brand clothes are actually paying more for the same thing, but are actually giving the company free advertisement as well. Stupid consumers.
@Daniel–Not always. I think it depends on just HOW expensive. For the purse example–I wouldn’t buy a purse for $800, and I wouldn’t buy a purse for $20. That’s because the purse for $800 is all about the name, and there is no increase in quality from a $200 purse, and a $20 purse is constructed poorly (I’ve had $20 purses before) and probably doesn’t look as nice. Does it fit all your stuff? Yeah, probably. But purses are not just for utility. I could just use a shopping bag, if that’s what I wanted. They are also for aesthetic appeal. I have yet to see a $20 purse that does not look like a cheap purse.
I like my purses to be in the $60-200 range. If I can get a $400 purse on sale for $200, I consider that a deal, since I am now getting that brand name at a discount. Unfortunately, brand names count when it comes to purses, since they are mostly a status symbol (for many women, some really are all about utility). My mom buys purses depending on quality–she likes really nice leather and couldn’t care less about the name. Her purses also fall into that price range, but for different reasons.
Oh, and yes, there’s definitely an anchoring effect at play–a $300 purse looks cheap if all of the other purses from that designer are $1,000. In fact, I remember convincing my dad to buy me a purse at Bloomingdale’s based on the idea that all the other purses there were several hundred dollars more expensive. It worked, since I was now a 15 year old with a $200 purse.
“People who were offered 10 cents said it would take about 33 cents to continue. People offered 90 said it would take 73.
“They repeated the experiment in other ways, but no matter how they messed with the sounds or the payouts, those who were first offered a low payment consistently agreed to lower amounts than those used to better wages. People who got more money at first were unwilling to accept lower payments later.”
I keep reading and rereading that, but my brain isn’t making sense of it at all. Am I simply misunderstanding the meaning? If people offered $0.90 were willing to accept $0.73 later, doesn’t that mean that people who were given more money at first WERE willing to accept lower payments later? Or is the $0.73 in addition to the $0.90?
I’ve recently started a blog, the information you provide on this site has helped me tremendously. Thank you for all of your time & work.
@Ann The experiment is showing how the minimum wage that people would accept to listen to an unappealing sound was significantly affected by the starting offer of the experimenter. So those who were initially offered a higher price set their minimum wage much higher than those initially offered the lower price.
Isn’t this more to do with the buyer focusing too much on the savings and not on the actual price of the item. As the saying goes: “Always look at what you’re paying, not what you’re saving.”
In the case of the jacket I would have checked out other clothes shops to see how their leather jackets compared to the $400 one in the shop, and go from there.
Similarly, if I see brand name cereal on offer at a supermarket with a “Buy-one-get-one-free” offer, I’ll look at the unit price and see $2 and what pops into my head is that these boxes of cereal are $1 each. I’ll then use the $1 price as an anchor and compare to the prices of other cereals, maybe the supermarket has it’s own brand cereal (same weight) for 90 cents, so now my choice is between $1 for brand name cereal or $0.90 for supermarket brand, so my choice is based on that rather than on the offer.
If consumers thought in this manner more often, we wouldn’t get ripped off as much.
I feel like the example with the Louis Vuitton purse is getting at a different concept. You mention that the brand name has “social value”, so in other words, people are willing to pay more for the brand name purse than the cheap Wal-Mart purse. But that’s only because the brand name itself has value to the consumer, so they are willing to pay more. That’s different from the anchoring effect – to give an example of that, you’d need to compare, say, a Louis Vuitton purse offered at $800 and the same Louis Vuitton purse offered at $400 – that way you’re comparing items with the same perceived value to the consumer.
Anyway, that’s just a small issue. This blog is excellent, I really enjoy the articles here :)
I make and sell my handmade craft for a living. Craftspeople and artists who sell their own work are in a different situation than the average retailer.
Retailers generally buy their goods at a particular price and mark it up by a fixed percentage to arrive at the sticker price. When they need to move those goods or have someone asking for a deal they may lower the price to make a lower markup or make no markup at all if they really want to just move the inventory out.
A craftsperson like me or an artist has to come up with a price that their work will sell at, based on their material costs and other business costs and hopefully include a fair price for the time they spent making the work. Because craftspeople and artists often undervalue their work to make sales, the prices handmade work will sell at, for those customers comparison shopping for similar items, is often quite low. Added to that is the fact that many customers are comparing original hand made craft and art with mass produced goods or imported craft from countries where craftspeople are paid very little to produce the work.
Because of the time and costs involved in making quality craft and art the sticker price can often look quite high to those who may not be familiar with looking at these types of things. The craftsperson or artist selling their own work at craft fair or similar venue frequently has to contend with people commenting that their work is “very expensive” when in reality most are selling their work for much less than they really should to make some sort of income. Customers who want to buy the work will quite often assume that the price is a “tourist price” and will start into haggling right away. Many artists who do haggle are only doing so by making their already small income, smaller still.
In many years, I have yet to see an artist or craftsperson selling their own work where the price was asking for too much compared to the time and expenses going into the work. If I lived in a country where haggling was the norm, I could price my work at double what I would like to get for it and barter with my customers who wanted to do so. But since haggling is not the norm here, that high sticker price would scare off most of my customers and look way out of line compared to other crafts available. I would love to be able to use the anchor effect to get paid more for my work, but unfortunately the sticker price on my work is what I absolutely need to get paid for it if I’m to continue making it and no more. I regrettably sometimes am reduced to going below that price when bills are upcoming, sales are slow and I need to generate some cashflow.
Just wrote this to let people know that not everything they see for sale is necessarily priced higher than it should be.
hei Jim,
I’m in the same position as you and I am using the anchor effect.. here’s how: You make a few extremely well crafted, original, good pieces, which you’ll love so much you dont even really want to sell them, and you set the price for these items as what they are really worth (yes, expensive). People will look at them and love them, but rather buy the much cheaper normal work you do (in similar taste), as they come out cheap in comparison…
good luck!
“Even if you’ve done some research online, you don’t know for sure exactly what the car is worth, or what the dealer paid for it. The focus instead is the manufacturer’s suggested retail price, and no matter how unrealistic it is, you can’t help but be tethered to it.”
The power of anchoring is not completely in the hands of the sellers. A smart car-buyer can look up the actual prices paid for new cars on various online forums or the value of used cars on sites like kbb.com. The last time I went to a car dealer, I had a list of the lowest prices paid for the car I wanted from that dealer and three of their competitors.
Fantastic site. Fascinating posts. Keep up the great work.
By the way, if you are going to choose a new country for this, go with Uruguay. I was stunned to learn (during the World Cup) that the population was only 3 million.
My guess was just 1 million more. I would love to see You Are Not So Smart as a Youtube edition. It’s a blog written so well and the entries are intriguing, but they tend to be the longest of all I allow myself to read on my day. Videos would be comfortable and would reach my brain faster and more effectively.
Love your blog.
~C.
lol, I guessed <1 million, I figured canada has 30 its gotta be alot less then that. Plus, I figured I had to guess real low so as not to be part of the anchor effect.
Interesting post. I got Venezuela nearly right, but I should admit to travelling round the country a while back.
You might also enjoy the book Irrationality by Stuart Sutherland.
Fabulous article! I’ll have to learn more about this… as a negotiating tactic it seems like it would be very valuable. My ‘problem’ is that I’m a very frugal person and rarely buy anything without comparing options and prices; and that carries over to when I’m selling my services… I tend to charge too little.
Good job and very true.
Cheers.
—-
clicking the link below used to be $1.00. Now it’s FREE.
http://lesporadique.wordpress.com/
I guessed 30 million, based on the map, giving 2 million for each major city and then some. Without the map as reference, I certainly would not have had a clue.
This article is extremely well written. It explains why all of the stores are constantly having ‘major sales’ and everything is infinitely on markdown (think any major big box retailer – Sears children’s clothing department comes to my mind in particular).
“Hm MSRP on this toaster is $300 but it’s on sale for $79.99!”
Sigh…
The question left unanswered, however, is: What if C-A-T really spelled dog?
I guessed 15 million, so what does that say about me. I knew right away that the 65 million mark was way off, so I totally disregarded it. Knowledge is power.
I guessed 30 million because I knew Canada had a population around that number and I have never heard of Venezuela being a particularly crowded country. Being much smaller than Canada, it’s population was probably not double that of Canada.
I do have to admit, when my husband needed a new leather jacket years ago, I was taken in by the $100 off at Mervyn’s.
Oh yes, a $800 Louis Vuitton purse definitely does function better than a $25 handbag from Wal-Mart. In addition to holding your stuff, it signals your income level, your esthetic preferences and the value of quality in your system. It is also a pleasure to behold, and it will not fall apart in a month. To be sure, expensive can be crappy, but cheap is crappy always.
Of course, self-serving bias will tell you that you buy cheap stuff because you are too smart (why go to a restaurant when you can get the same amount of calories way more cheaply from instant noodles?), too honest (those who are wealthier than you are surely steal [probably from you], bribe and sleep with the highest bidder) and generally too good (no, you’re not glued to the TV: you’re spending time with the family, unlike the immoral jerks working their asses off because they only care about money). It is a comforting illusion, but an illusion nonetheless.
And yes, like Daniel says in the comments above, you do provide free advertising when you have a brand name written across your chest. But what is wrong with that? Are you jealous because they are already rich and you are helping them get richer still? If you don’t like the item, don’t wear it. If you do, you could as well let people know the name of a company that, in your opinion, makes great clothing.
As to Venezuela, I guessed 15 mn. Do you think so many commenters do not fall in the “most people” category because those who do are less likely to comment or because the assumption about most people is inaccurate after all?
@Nikki: I think why so many commenters do not fall into the “most people” category has to do with a variety of things, including those you mention, but also including that the audience of this blog is less likely to fall into mental traps (while certainly being not immune to it) simply because of an above-average degree of self-reflection and conciousness of our own limitations.
Such an excellent post.
Dan Ariely is a provocative reference. He covers many interesting topics as well as some that might be characterized as silly.
I suppose the “snake oil” salesmen of old and the merchants of New York’s garment district have long been familiar with the anchor effect.
While I agree that no designer purse has a “real value” justifying their exorbitant prices, it should be noted there’s an enormous difference in quality between a Louis Vuitton and something anyone might find at Wal-Mart.
It has to be illuminated that most Vuitton merchandise can last for decades because of the superb quality, although I agree that this fact still doesn’t totally justify the price tag.
Internal anchors conquering!
(Unfortunately, I think David used the gaudiest and most unattractive example of an LV bag on purpose to make his point. LOL!)
In any case, I love this post because it explains quite thoroughly how we go about our decisions in daily life and even if we know all these things, we’re still directed by both external and internal anchors.
This article can be applied to the stock market when people buy a stock/mutual fund for X and can’t bear the thought of selling it at a loss hoping it goes back up so they can sell it, not realizing if they sold the stock/mutual fund and bought something else that is also down, that the new stock/mutual fund might go up just as much as the previous financial instrument. Everyone wants to buy low and sell high, yet many people sell low and buy high. Who is to say Apple stock is “worth” $120. But if you bought it for $150.00, you hate to sell it at a loss. Same with real estate. Home prices are based on what someone is willing to pay for your house, but realators will anchor the price of a house and you won’t sell it for less than what you paid for it. Fascinating psychological stuff.
read this article, and then watch Steve jobs announcing the price of the Ipad.
I really liked Cee’s response – right on target.
While I know I am influenced by the Anchoring effect, it is certainly exaggerated in most of the studies listed. Since the people had no real financial loss to deal with and no good bearing to go by, they would of course start with the anchor suggested by the experimenter. In the real world I always try to think of “absolute” pricing vs. what some sale price says I’m saving. The hardest ones are those “impulse” buys when you’re not familiar with a product and you are faced with a “buy it now or lose it forever” deal. I usually walk away from those deals, although I did have to learn the hard way a few times when I was younger!
In the case of the Jacket, the buyer likely had some price in mind when shopping, and $1000 was certainly way off. Does the salesman really know that $400 was the right mark, or could he have said $600 and gotten the sale? It certainly could be exactly as stated though. The buyer might have been thinking $200, and thought, “but here I can get a $1000 jacket for only $400! Sure it’s more than I wanted to pay, but this is a great deal…”
While the example of the iPod price is good (Steve Jobs does the old commercial trick of “how much would you pay for all this – $1000, $800? Well how about $500!”). He should have followed it up with “and buy today and we’ll throw in not one, but two sets of headphones, a $100 value, for free! However, I do remember thinking before the announcement was made that the device had better be around $500 or I’d never get one, so there was more here than pure Anchoring alone. I almost think Steve was doing that tongue in cheek.
Finally, the old Price Is Right show made great use of the Anchoring Principle.
Great post, thanks!
Looking at the above comments, there are surprisingly many good guesses—possibly, simply because the wish to comment about the guess is influenced by the quality of the guess? However, those with good guesses also seem to have not just grasped numbers out of thin air, but actually done some reasoning, e.g. “I figured Venezuela is a small country in comparison, and 10% of the US seemed about right.”. In my case, I arrived at 30 million by a dose of luck and the chain of thought “If it was as large as 65 million, it would have made a larger impression on me compared to the other S-A countries minus Brazil. Say a very rough upper estimate of 40. Venezuela is large area-wise, by European standards, so say 20 as a rough lower estimate. Now split the diff: 30.”
Rough approximations based on reasoning can do a lot to improve the quality of a guess. (But, as said, the small error here had a dose of luck.)
As for luxury items, volumes could be written about that topic, including the fact that many confuse price and value, and that others want to buy the exclusivity rather than, e.g., the bag per se. Another issue is displayed by the commenter Jim:
The point is not what it cost you to make your product—it is what kind of value the product brings the customer. If a mass-produced item bring almost the same benefit as (or even a greater benefit than) a labouriously hand-crafted item, a price difference of even 10 % may legitimately be “too expensive” to most customers. Certainly, very few will want to pay the very sizeable differences that are often present in practice.
interesting article, although i learned this in intro to marketing
just a in little less lyrical fashion
Has this ever been testing as a parenting technique? For example, “You need to eat 20 peas… OK, just eat 10 and you can go play.”
That would be a different technique: http://en.wikipedia.org/wiki/Door-in-the-face_technique
ironic for a self-deluded idiot to write about self-delusion.
I guessed 30 million for the population, but I used other factors than the 65 million “suggestion” like a lot of the previous commenters, including the population of the U.S. as well as remembering my daughter’s descriptions from her visits there.
Never would I have guessed 28 million. If I’d come to the conclusion that 30 million was way too high, I would have guessed 25 million. Is thinking in certain multiples also a sort of anchor effect?
As for designer items, I admit that I’m snobbishly anti-snob. And cheap, though I can be persuaded by quality and utility. Someone would have to pay me to carry a Louis Vuitton purse. I suspect anchoring is still a factor in some way there.
Aw come on you are exposing deflation tactics and we need to be scared of that. Soon the leather jacket will be just $100 bucks thanks to you as everyone catches on. Gotta get that jacket to $2000 for our country to thrive again.
I remembered that some smallish European countries have around 6 million people, and I thought that Venezuela was smaller, so I guessed 4 million. The 65 million passed through my brain without leaving a mark. I’m an Aspie, though, and very focused and literal, so it’s not surprising that I wasn’t affected.
When a salesperson tells ME that an insanely expensive item is really just wildly expensive, I laugh in their faces and say that it’s still 10x what I’m willing to pay. And that’s the end of that.
I actually DO rationally analyze all factors before making a choice or determining value, for everything, all the time. I’ve never seen another human being who does, though.
I guessed 30K. Woot.
I didn’t even bother guessing the population. mom always said, once you go name brand, you can’t go back. I know that 1 bedroom condo isn’t worth 3.5mil, but I want it!
I found this article to be total bullshit for four reasons: 1. I am that smart, apparently. 2. I’ve had over 60 jobs in a variety of retail, food, and tourism positions, so I have a better understanding of actual cost and what things are worth (though worth is arbitrary and subjective). 3. I grew up poor, have always existed below poverty, and live in one of the poorest parts of my nation. I almost NEVER think anything is worth more than rock-bottom, flea-market prices. 4. I hate the orientation of this article. Writing it using the second person pronoun, “you,” assumes that EVERYONE who reads this falls for these tricks or is somehow ignorant to them. I hate that bullshit. I prefer more accurate grammatical syntax.
I would love to see how people would guess about Belarus instead of Venesuela. I am from Belarus …
I guessed that the population in Venesuela would be around 3 million as I compared it to Belarus (10 million) and to the Caribbean countries.
I guessed the population at 35 million, but I only came up with that by “guessing” it was around half of the original figure
28 million, but then, I visit 2 blogs every day about Venezuela.
Hehe I guessed 45 million people for Venuzuela, but my anchor (or one of them) must be the fact that I am from the Netherlands which has an average population of 400 individuals per square kilometer (1036 per square mile)
It’s funny, I knew some salesmen and in lots of ways they use anchors, not just when it comes to pricing, anything specific about the product can be used.
The people that guessed 10 million were “more” wrong than the ones that guessed 40 million. They suffer from the hubris enduced double secret reverse anchor effect. “I am so smart since I know about the anchor effect, so I am going to be wrong by over compensating.” So you knew about the effect, but you were wrong in the other direction. You should have known better but you really blew it.
I also guessed 10 million, but my anchor was the population of Missouri.
Which I guess goes to show that the anchoring affect is real, but just stating a number hardly requires people to accept it.
Matt–
Your (10:08 AM) is hilarious!
Have you always been a party pooper?
I was pretty close on Venezuela: 25 million.
I think your experiment was done in by cartography. I know roughly how many people are in a city represented by a certain-sized dot on a map, and based my answer on the number of cities shown on the map you provided, with a few more added to fill in.
Now, had you produced a fake map that showed a lot of big red dot cities with names in bold, and plenty of smaller black dots, that might have raised the population expectation. Your point about finding an anchor is correct, but don’t underestimate your subjects’ resourcefulness. I bet if you had another leather jacket on a nearby rack for $65, the $400 “sale” price would have seemed much more unreasonable.
Micheal Erikkson replied to my comment:
+++++++++
Jim:
The point is not what it cost you to make your product—it is what kind of value the product brings the customer. If a mass-produced item bring almost the same benefit as (or even a greater benefit than) a labouriously hand-crafted item, a price difference of even 10 % may legitimately be “too expensive” to most customers. Certainly, very few will want to pay the very sizeable differences that are often present in practice.
++++++++
I understand that and as a maker of hand made things I don’t expect everyone to get it or want to pay for what I do. Hand made does not necessarily equal superior quality in all cases either, but in many cases there are things that simply can’t be made the same way if mass-produced. A painting for example. A print might be fine for some.
I do put up with a lot of snarky and indignant comments from those who don’t get it, but that’s life in the market place. The problem I often have is with people who appear to appreciate the difference of a hand made item, want to purchase one of my things, yet assume the same mechanics of pricing go into the prices they see as something mass-produced. Some I manage to educate, some not. Some who may have been involved in the arts often make refreshing comments such as “what a bargain!”.
Hm, fairly interesting article (It probably would’ve been more interesting if I hadn’t already read about this in How We Decide (Leher) and Stumbling on Happiness (Gilbert), both of which cited a study on anchoring in which researchers asked people to guess the number of African countries in the UN after having been given an anchor of ten or sixty.), although I think a lot of people are probably already aware of jacked-up prices because they exposed to them all the time. I say “a lot,” but I don’t know what percentage. It would be interesting to learn whether a majority of people do or don’t take anchoring into consideration when buying things, whether cans of beans or new cars.
Another thing that is related to this is how people tend to think in percentages rather than straight dollars/pounds/pesos/etc. Another study showed that people would be willing to drive twenty minutes out of the way to save $5 on a $15 calculator but not $5 on a $100 calculator. Even though the amount of money saved was exactly the same, people thought it was more “worth it” because the percentage off was larger.
Those people who say that they guessed a small number because “they knew venezuala couldn’t be that big” already had an idea or anchor in mind. One guy said, oh, the U.S. has this many, they can’t have that many. It’s still the anchoring effect, you just put more thought into it I think, and used another anchor other than the number that was provided.
I freakin love your blog! I’ve been combing through the entire thing, please keep it coming!
Similar effect happens with ‘no-name’ brands at the supermarket. Tthey’re not there as a cheaper alternative but to repulse you towards the ‘normal’ brands i.e. they’re so bad they make you want to pay for the ‘normal’ brand. Hence why their labelling is so terrible – not to save money on printing (which is a miniscule relative cost) , but to make sure you realise this is definitely a worse option and hence make everything else look better.
So lesson is, buy the no-name brand as (most of the time) it’s just as good and is only a decoy.
That picture on top of the blog, is a bit of an anchor on my opinion of the site.
Makes me feel all flirty, and light headed.
Maybe we could e-mail each other some time? ;)
I guessed 20 million.
I didn’t waste my time trying to guess the pop. of Venezuela. I had absolutely no idea, nothing to base my guess on, and therefore felt I had no business even trying. And that’s essentially my point: that’s why they call it a “guess”, regardless of what it’s based on, whether an “anchor” number or just yanked out of my ass. See the quote below ( it’s only 11 secs.)
My wife and I price shop for almost everything and arrive at a value based upon all the available prices and trying our best to factor in quality and value. For example: Great Value brand nacho chips are much cheaper than Doritos, but they suck. Therefore Doritos are a better buy, even though they’re more expensive.
For things like electronics, I always ask the salesperson what they would buy and why. When this is done at a variety of stores and the person knows that you aren’t going to buy until you talk to other knowledgeable people, you would be surprised at the honesty you can draw out. It also helps you to recognize when a salesperson is bullshitting or really doesn’t know squat about what they are trying to sell.
NEVER buy right away from the first person you talk to. However, many times I’ve gone back to that person after talking to others.
I’d like to think that I am relatively immune (relatively!) to the anchor effect, but this has cost me dearly in negotiations, because I tend to reason out my absolutely final stance and start from there. The other party makes a concession, and I don’t budge. The negotiation falls apart because we’re not playing the same ball-game: I come to the table with a list of reasons why I have stance X, and [figuratively] say, “you need to give me reasons to budge by attacking this [figurative] list, or X is final.” They ignore the list and say to themselves, “OK, stance X, so that means I can at least work him down to about stance Y.”
I since learned about the anchor effect which explained a lot of why I had to walk out on a lot of negotiations; I had foolishly and naively done all of the compromising up front, while the more seasoned negotiators assumed I arrived at the table with the compromises left in as bargaining chips. X( *sigh*
@Fenn: 60 jobs? Really? I wouldn’t have been able to predict that, based on the tone of your message.
@Mel V (near the top): That’s a common technique to get people involved when otherwise they’d be silent. The blank page is daunting, but somehow people don’t have any trouble pointing out the flaws in someone else’s work. Everyone’s a critic…
This is really interesting, especially the Venezuela experiment. I enjoyed the article.
@Dominic Pettifer
Your cereal reminded me – the Australian government has just passed legislation which says that supermarkets must list a ‘price per standard unit’ alongside the actual item price. So when you see your 375g jar of -foo- and want to compare the price to a 410g jar from a different brand, they are now directly comparable as the pricetag must include the prorata cost per 100g.
It’s a clever bit of legislation to get around the old trick of offering weird sizes to confuse the buyer’s perception of prices. It’s working well so far.
I guessed it was less than 65 million, but I had no idea about the exact number. When asked about the exact number, I still had no idea… until I saw the map. Then I somehow calculated the number based on that (and the fact that Venezuela is in South America), then my guess was 30 million. What effect is this?
See there’s anchoring going on in the guesses: everyone anchored. Their accuracy was sometimes based in what they used to anchor and sometimes on luck. Anchoring based on expectations of city size etc would probably lead to a more realistic amount.
As another Aussie, I anchored based on the size and sparse population of my country compared to say Germany. We have 21 million people in Aus, but that’s quite a small population around the world. Hence I would always guess higher (unless it was tiny country). The US with a large population would guess lower because they are used to countries having smaller populations.
But I don’t know, maybe that’s not anchoring, maybe that’s experience. You would be more likely to say no to the $400 jacket if you were a jacket salesman and thought it was too expensive.
Maybe anchoring is only really relevant in areas you have very limited experience in.
@mewhoelse
We have to differ between two things here:
o Anchoring through an association with an arbitrary figure.
o Guestimates based on previous knowledge (e.g. that USA has 300 million citizens and that Venezuela is noticeably smaller) and reasoning.
The two are very different.
Not a single example given in this article has anything to do with Anchoring. Some of them are door in the face actions, and others are an error I’m not familiar with (possibly related though), but Anchoring is focusing obsessively on a specific aspect of a problem, and ignoring the rest, for example, considering the price of used cars but not the age or milage.
I guessed 45 million to your anchor of 65 million
exactly the figure from the experiment :S (without the millions)
the experiment about the students being asked to volunteer made a lot of sense too
I just know I’ve made that exact “error” many times before. (wonder if they did that on purpose or if the first deal was real now)
real eye opener this one.
@requia: You are way off base. Many of the examples here are exactly anchoring. The social security number experiment is a clear anchor example, as is the spinning wheel. For the rest of you that don’t think you use anchors: I believe you are doing what we all do by thinking “Not Me” when we watch a horror film, a game show, or editing someone’s work. Of course THEY anchor, the silly dummies out there… but I do not anchor. Your evidence is the you assuming you didn’t get “tricked” by the Venezuela anchor, but you ignore the principle at work: having little or no reference point, and being provided a number…any number… such as YOUR OWN social security number, you brain will on it’s own make a poor choice in so-called random guessing. You will think you are totally guessing or are using some “other” anchor, but you be anchored to that last number which has no relevance. You saying you don’t do this or are “too smart” for it is like saying you don’t fall for optical illusions. Anchors are illusions of the mind… illusions of control. You may sometimes limit their effects on you, such as “knowing” an optical illusion isn’t really spinning on the paper, nonetheless it certainly appears to move. For those of you that think you were overcame the anchor by using your other reference points (USA population, for instance) are making the point of those that study anchoring effects. You MUST use an anchor to make decisions. You will sometimes use a ‘good’ anchor like similar sized countries… you will otherwise choose bad anchors like “this $1200 40″ LCD TV is a good deal because they only have three models: $5000 46″ LCD, $1200 40″ LCD, and $950 27″ LCD” – Those of you proudly posting here that you always skip the top model and the lowest model are doing exactly what the marketers want. Is that bad? No, but you chose a bad anchor. The anchor isn’t the other models of different sizes and prices…the anchor is other models with the SAME SPECIFICATIONS. Last, if there is NO anchor available (for example, another leather jacket with the same specs in another store), you will choose an anchor as best you can and it will usually be irrelevant to the transaction or decision. In fact, you will sometimes think you are randomly guessing or picking a number out of the air, and yet you will be anchored to a number – as show in the social security number experiment. By the way, I hope you LOVE this response. It is only the 2nd i have written here, but i hope you think it’s pretty good and ranks pretty high? ;-)
Holy shit I guessed 28 million.
I guess I am the only one who totally fell for it. I guessed 72 million… yeah, I’m a dumbass,
BUT!
There’s hope for me yet, as I have been completely enlightened by this article!
… maybe not, but it’s fun to read, partially because of the author’s awesomeness of word choice and partially because human psychology is an alluring subject.
For anyone who thinks they are too smart to be anchored because they GUESSED at the population of Venezuela. Think again, if you were smart, you’d KNOW the population of Venezuela.
Anyways, this wasn’t a test to see how smart you are or are not… it’s just an observation on how ALL MINDS WORK…
“[...]if you were smart, you’d KNOW the population of Venezuela.”
You confuse smartness and knowledge—and even someone with enormous amounts of knowledge in his brain may be ignorant of the population of Venezuela.
Now: Was this error of yours caused by a lack of knowledge or a lack of smartness?
(Besides, who claimed to be immune to the anchoring effect?)
childrens clothing should be as comfortable as possible that is why the choice of fabric is also critical `*:
I had never heard of door-in-the-face, it sounds like something you made up, haha :P I was confused because I’ve heard of foot-in-the-door.. I guessed 10 million too. Weird!
I thought 65 million was too low. Oh dear.
Very interesting read. One nit: phenomenon is singular. Plural is phenomena. Cheers, mate!
It is happening everywhere in this so called fair market, people are just driven by money and that’s what this is all about…
In the purse example, an $800 purse will definitely last longer than a $20 purse. But from a pure utility standpoint, the question is does it last 40X as long – it’s possible if Louis Vuitton purses can last decades. Then we add in the fact that the purse probably works better than a WalMart purse – designed to hold things more easily, probably better pickets for organization. And that’s before we add in anything about social value.
I have the same example is with good quality hiking sandals – $100. But they lasted 5 years before I decided to get a new pair. So that’s $20 per year – ie 2 pairs $10 sandals per year – which sounds about right. Add in that I got the benefit of better design and it was worth it.
If a LV purse could last decades (and assuming that it is not lost, stained, goes out of fashion, whatnot, during that time), this will still not be enough: Even an ordinary purse can last for years—possibly even decades. Further, many expensive items are actually made with a comparatively short life time in mind and buying expensive can actually backfire in this regard. (I have no idea whether this applies to LV.)
The practical aspects are probably against top-of-the-line fashion articles. An expensive handbag is made to impress others; an inexpensive one to be practical.
Social value? Pride and shallowness may be flattered by such products, and they may impress those of a similar mindset; however, to many others they send a negative message about their owners.
I have no experiences with hiking sandals, but if we look at regular shoes: Either someone walks a lot, in which case the soles will be to worn out in one or two years (be the price $40 or $400)—or he does not, in which case even cheap shoes of (within the price range) good quality can last five years, with reservations for the optics of the surface of the shoes. Further, the optics will typically depend more on how the shoes are treated than on their price—and the more expensive the shoes, the greater the likelihood that a stain or worn-out spot will be deemed inacceptable…
I guessed 30 million.
But these still definitely affect. Especially the price anchors. I don’t know anything about economics, I trust the salespeople to set a fair price… and it it has to be high for them to get their salary, that’s OK.
For at least the last year, a can of regular beans at Trader Joes was 89 cents, while the price of the organic version of those beans was $1.09. Recently, the price of the regular beans went up to 99 cents, while the organic beans stayed the same at $1.09. I’ve always purchased the regular, lower-priced beans, as the 20-cent difference for the “better” beans were not worth it to me. But since the price of the regular beans went up, and the difference between the beans is only 10 cents, I’ve since been purchasing the organic beans. It looks like the “anchor effect” is happening in this case: the price of the organic beans is still the same, and more expensive, than the regular beans (albeit by a dime), but I think I am getting a better deal. In my mind the regular beans are only worth 89 cents and not a penny more.
-fine Burberry dress the word are so meaningful.
How much does it cost to buy your book? Is it $100? Whats that you say? On sale for $49.99? I must have it…
Awesome observation. I guessed 10 million.
WHOA I guessed 28 million