Anchoring effect

The anchoring effect is the pull of a first number. When you have to estimate something you do not know well, such as a fair price for a sofa or the value of a used car, your mind grabs whatever number is at hand and adjusts from there. The trouble is that the adjustment stops too soon. The final answer stays closer to the starting point than it should, even when that starting point was chosen by a seller, or by chance.

The wheel of fortune

In 1974 the psychologists Amos Tversky and Daniel Kahneman published a short paper in Science describing three mental shortcuts that people use when they are uncertain. One of them they called adjustment from an anchor.

The demonstration was simple. People were asked to estimate quantities stated as percentages, such as the share of African countries in the United Nations. Before each estimate, a wheel of fortune was spun in front of them, landing on a number between 0 and 100. They first said whether the true figure was higher or lower than that number, then gave their own estimate. Different groups got different numbers from the wheel. When the starting point was 10, the median estimate was 25 percent. When it was 65, the median estimate was 45 percent. Paying people for accurate answers did not shrink the gap.

A second test showed that people anchor on their own half-finished work, too. High school students had five seconds to estimate a product written on the blackboard. One group saw 8 × 7 × 6 × 5 × 4 × 3 × 2 × 1 and gave a median estimate of 2,250. Another saw the same numbers in ascending order and gave a median of 512. The real answer is 40,320. Both groups worked out the first few steps, then guessed, and the group that started with the bigger numbers guessed higher.

Anchors and prices

Nearly 30 years later, Dan Ariely, George Loewenstein and Drazen Prelec took the idea into a market. At the first meeting of a market research course in MIT’s Sloan School MBA program, 55 students were shown six products: a cordless trackball, a cordless keyboard, an average bottle of wine, a rare bottle, a design book and a box of Belgian chocolates. First, each student said whether they would buy each item for a dollar amount equal to the last two digits of their Social Security number. Then they named the most they would actually pay, with a real chance of having to buy.

The random digits mattered. Students with above-median numbers stated prices 57 to 107 percent higher than those with below-median numbers, depending on the product. Those in the top fifth offered, on average, about three times as much as those in the bottom fifth: $56 for the keyboard, for example, against $16. Yet their rankings stayed sensible. Almost everyone valued the keyboard above the trackball and the rare wine above the average one. The authors called this coherent arbitrariness: the starting point was random, but everything built on it looked orderly.

Why it works

When you do not know what something is worth, you need a starting point, and the first number available is usually good enough to feel like one. From there people adjust until the answer seems plausible, and they stop at the near edge of the plausible range. An anchor also steers attention. Thinking about whether a coat is worth $400 calls to mind the reasons it might be, so the case for a high price gets built before you notice you are building it.

How anchors run a chain

Anchors are especially costly after a big purchase, because the big purchase becomes the anchor for everything that follows. A $1,499 television makes a $199 mount sound like a detail. The mount makes a $149 cable kit sound like a rounding error. By the time a $249 protection plan is offered, it is being compared with a running total of nearly $1,900, not with what a protection plan is actually worth. Each add-on is judged against the last price you agreed to, which is exactly the habit that turns one purchase into a chain.

Where sellers drop anchors

• Reference prices. A crossed-out “was” price or a manufacturer’s suggested price sets the scale before the real price appears.
• Expensive first. Showing the premium model, the top tier or the most expensive bottle first makes everything after it look moderate.
• Suggested amounts. Preset tip, donation and quantity buttons hand you an anchor and invite you to accept it.
• Add-ons after the big yes. Accessories and plans are offered at checkout, when the anchor is the largest number you have just agreed to. Our page on how marketers use the Diderot effect goes through the checkout sequence step by step.

How to set your own anchor

1. Write your number first. Before you look at a product page or walk into a showroom, decide what the item is worth to you and write it down. Any price above it needs a reason, not a feeling.
2. Get a second reference. Check the price somewhere the seller did not choose: a price history, another store, or the cost per use. A single reference point is an anchor; two give you a range.
3. Unbundle the add-ons. Judge each extra as if it were the only thing you were buying that day. Would you make a separate trip for a $199 wall mount? If not, it is riding on the anchor.
4. Put a day between the big purchase and the small ones. The anchor is strongest at the register. A waiting period such as the 30-day rule lets the big number fade before you decide on the rest.

Where it meets the Diderot effect

The Diderot effect explains why a new purchase makes the things around it look wrong; anchoring explains why fixing them feels cheap. Once Diderot had his scarlet robe, its value became the reference for the whole study, and a costly desk or a morocco armchair looked like a small price to pay for harmony. A chain grows fastest when each new link is compared with the last one instead of with your budget, and anchoring is the habit that makes that comparison feel natural. The decoy effect works the same angle from the other side of the price tag.