Anchoring, as defined by Psychologists Amos Tversky and Daniel Kahneman in a 1974 experiment, is an essential psychological process in the arena of sales and persuasion.
People tend to rely too heavily on a piece of information when making decisions. We have trouble sufficiently adjusting any resulting estimates or conclusions reached based on the information presented to them.
Suppose I asked you the following question:
“Is the population of Belgium greater or fewer than 50 million?”
Take a minute and write down an answer.
Now, answer this question:
“How many people reside in Belgium?”
Write down your guess.
Now look at your two answers.
Your first answer, no matter how arbitrary, almost certainly influenced your second. Odds are your guesses on the first and second questions were influenced by the original figure of “50 million”.
(The answer, by the way, is about 10 million.)
We are susceptible to Anchoring, in large part, because of the manner in which we evaluate information.
When tasked with determining the validity of a question or statement, we search for evidence that confirms, not disproves, the given information. Our Confirmation Bias further entrenches the starting point in our mind. Even when faced with an arbitrary number or value, the anchoring effect does not wane. It takes a significant, conscious effort to overcome this psychological occurrence.
The effect is particularly strong in arenas where we have little knowledge or expertise. Since most people are unaware of the anchoring effect, deft use of an anchor can prove extremely valuable. Sales tags at retail stores and price stickers at car dealerships prey on this cognitive bias.
Practical Application:
Life is a series of negotiations. We barter and communicate with the people we interact with on a daily basis. Anytime you attempt to get someone to do something for you in exchange for consideration, you are negotiating.
When requesting a concession or negotiating price, present an initial offer at or near your ideal outcome.
The old adage of ‘never make the first offer’ doesn’t always ring true. In fact, you may be better off making the first offer and steering the negotiation from the get-go.
If you’ve done your research (a must before any negotiation session), you should have a sense of the range of feasible values for the item in question. Start with an offer that’s just outside the high end of that range. If the other party accepts, great! If not, ask for a counter-offer (avoid unilateral concessions in a negotiation). Your initial offer will influence their counter-offer. Most people want to avoid conflict and facilitate an agreement, so they are unlikely to voice a figure that is worlds away from yours.
Arm yourself with as much knowledge about the topics and items up for discussion during a negotiation so you can avoid succumbing to anchoring bias yourself.
Be sure to perform due diligence before any negotiation to ensure that your initial offer will not be insultingly high or low. Beginning a negotiation with a ridiculous or ‘low-ball’ offer is off-putting and could permanently sour relations.
You can also use the Anchoring effect to increase revenue right at the point of sale. If you own a restaurant (or any business where tips are customary), place a ‘suggested tip’ section on all receipts. A statement such as ‘15% gratuity is appreciated’ will suffice. This number will encourage patrons to tip a more favorable percentage instead of a smaller amount (or not at all).
Learn more about negotiation here.