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Anchor Management

I would like you to try this experiment: write down the last 4 digits of your phone number. Really. Actually write it down. Now estimate how many doctors you think there are in Manhattan. Write that down too.

There is absolutely no correlation between those two numbers, right? Studies have shown that if your phone number is in the 000-2999 range, your estimate of the number of Manhattan docs is lower than it would have been if it was in the 7000-9999 range. In fact, the average difference in estimates between those ranges is around 75%!

By the way, the low phone # average guess of doctors is around 16,000, and the higher phone # estimate average is around 30,000. Did your guess correlate to your number?

Though you didn’t do it consciously, the subconscious brain uses the four digits of your phone number as a shortcut to help you estimate. That confounding lizard brain is messing with your rational decision making again!

Anchors aweigh!

This is "the Anchoring effect" in all its irrational glory! Anchoring is a fascinating heuristic (shortcut) the brain uses to help navigate uncertainty. Sometimes the anchor is arbitrary like in the example above, and sometimes it is relevant – even deliberate.

Imagine you are shopping at a discount store and the price tag reads: WAS: $49.99, NOW: 29.99! Of course, you know that is designed to make the "now" price look better, but because it uses our subconscious anchoring mechanism, it works even though you are aware of it!

When the anchor is set you can’t help but see the adjusted price as a bargain. That is, until you shop at a different store the next day and see the same item for $19.99. D’oh!

Does expertise trump anchors?

Many studies have been done on anchoring and the results are surprising. In one study, real estate agents were asked to give an appraisal on a house. They were all given identical background material on the property, including comparable-house transactions. Then they were shown the list price, though this was bogus and different for each agent. The agents who were shown higher list prices gave higher appraisals than the agents with lower list prices.

The kicker - less than 20% said they used the list price in their appraisal. So even being an expert in your field and trying not to be influenced by outside forces will not help you escape the effects of a strong anchor.

Marketing and sales professionals are experts at anchoring. Here are some more common examples from the retail world to watch for:

- “10 for $10” - This type of promotion entices the shopper to buy more units, even though the same price applies if you buy one.

- “If you buy now I’ll knock $500 off the price.” Another example of using the original price as an anchor and adjusting down. But beware whenever you are being pushed to make a quick decision. That's a big red flag! The salesperson is trying to get you to not think, which means you should actually think more and get more price quotes!

-“Limit 12 per customer” – Do you think the reason stores set limits is to keep those overzealous shoppers from snatching up the store’s entire supply? So did I. But think about it – wouldn’t the store want people to buy as much as possible? And that is what the limit does. Studies show you are more likely to buy more if they indicate there is a limit. (Oh, and if you try to buy more than the limit - I bet they don't stop you!)

What to do?

Most of us are at a natural disadvantage when negotiating a deal or purchase because the seller is a pro at it and we are generally not experts. However, you can use anchors to your advantage, especially when dealing with professional sales people.

When starting a negotiation, be the one to set the anchor. If you sit down with a car salesman, proclaim an unreasonably low price before he can set his own anchor. You’ll adjust from whichever anchor is set first so make sure it’s yours! If he throws out a price first (like MSRP), immediately counter with your ultra low price to counter the effects of their anchor.

Completely avoiding the effects of anchors yourself is tough to do. Awareness alone will not make you immune from their effects, but it can help you recognize when you may need to take a step back to consider all alternatives before making a decision – especially a big one.

Think well, be well!

- Steve Haffner

Want to learn more about improving your thinking and decision making?


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