Answer this question without using the calculator. 333 x 2 is > or < than 74 x 9? – Now check the calculator and then read through
Yes, that was sneaky, but I hope that line caught your attention
The human mind is an intricate web of cognitive processes that shape our judgments. One of these cognitive biases, known as the Anchoring Bias, has a powerful influence on how we make decisions
Anchoring Bias is the reason why we rely heavily on the first piece of information we receive, using it as an “anchor” to make subsequent judgments or decisions. This initial piece of information significantly influences the overall thought process, making us lean towards decisions close to the anchor, often neglecting alternative valuable infos.
Some real life examples of anchoring more interesting than the above
- Pricing: When purchasing products, we are often influenced by the first price we encounter. A high initial price may make a later discounted price seem like a great deal, even if it is still higher than the product’s actual value.
- Negotiations: For example in job interviews, we’ve all been there. The first number floated around often serves as the anchor for further discussions. Job seekers tend to focus on negotiating around this initial offer, which may lead to suboptimal outcomes for both parties.
- Real Estate: Home sellers who set their initial asking price too high may experience difficulties in attracting buyers, as potential buyers often use this anchor to assess the value of the property*
But what are some ‘negative’ implication of such phenomena?
- Distorted Decision-Making: We tend to fixate on one piece of information, preventing our brain from considering a wide range of other important factors. This may generally result in poor decision-making
- Financial Consequences: In an investment scenarios, we often anchor to past stock prices and we may be reluctant to sell even when the stock’s value has fundamentally changed, leading to financial losses
- Negotiation: Two or more parties anchored to extreme positions in negotiations might find it challenging to reach mutually beneficial agreements. Politics these days is festered by that
- Professional Judgments: Doctors, lawyers may all fall victim to the Anchoring Bias when diagnosing illnesses or evaluating legal cases, potentially leading to misdiagnoses or overlooking critical evidence. This is because they are influenced from the whole past history of the patient/client.
As the wise man says “Acknowledging an issue is the first step towards finding a solution”, if we become more aware of this, some interesting personal growth opportunities may arise
- Awareness and Mindfulness: Being aware of it, means we can counter its effects. Practicing mindfulness during decision-making can help individuals recognise when they might be fixating on an anchor
- Utilising External Perspectives: we can seek input from others during decision-making processes to gain fresh insights and challenge any biases or anchors that might be influencing your judgment. ~ Rule of thumb: ask your spouse, ask a friend, ask a colleague you trust. 3 is the perfect number
- Data-Driven Decisions: we can rely more on data and evidence-based information to reduce the impact of the Anchoring Bias and be more objecive
Real Estate Anchoring – A typical case
Imagine your uncle Bob is looking to sell his house as he decided to retire on an island in the Carribean. He did some research and based on comparable properties in his neighborhood, he estimates that a fair market value of his house is around 400,000 Eur.
However, also his neighbor decided to sell his house as he also wants to retire. The listing is similar in many aspects, and was recently listed for 450,000 Eur.
Anchoring Bias in Action
- Since he’s aware of his neighbor’s listing price of 450,000 Eur, this information becomes the anchor for his own decision-making process. He starts to believe that the house is worth around the same amount, irrespective of his previous market research
- When potential buyers visit the property, many of them might be aware of the recent listing price of 450,000 Eur for the neighbor’s house. As a result, they may also be anchored to this higher price point. Consequently, buyers might hesitate to make offers close to the initial asking price, believing that they can negotiate a significant reduction from the perceived “high” anchor
- Since your initial asking price is anchored to the higher value of 450,000 Eur, your uncle might decide to wait for potential buyers to make offers closer to that figure. However, as time goes by and no offers are forthcoming, the house may sit on the market longer than expected, leading to increased carrying costs and potential frustration.
- Your uncle Bob eventually realises that 450,000 Eur is unrealistic for your property, and he might need to reduce the asking price closer to its true market value of 400,000 Eur. However, by this point, the house may have lost some appeal to buyers who perceived it as overpriced, and Uncle Bob might have missed out on potential buyers who were scared away by the initial high anchor.
- Uncle Bob cannot move to Carribean and he has to endure another Berlin’s winter
2 very easy way to prevent such situation would be:
- To base the initial asking price on comprehensive research of comparable properties and market trends rather than using a single listing price as your anchor.
- Keep Emotions in Check: Understand that personal attachments and emotions to your home may influence your judgment. Be mindful of these biases and focus on objective data when pricing your property.
Similarly, and we’ve all been there either as applicants or as hiring managers or as recruiters – during an Interview, when the question comes “So, what’s your salary expectation?”
What about past experiences? Do they also influence decision-making?
In decision-making, past experiences also play a crucial role
Our previous encounters and outcomes shape our understanding of various situations and guide our choices. These experiences provide us with valuable insights, and whether positive or negative, they serve as a reference point for evaluating potential risks and rewards. By drawing upon our past experiences, we can make more informed and rational decisions, avoiding repeating past mistakes and capitalising on successful outcomes.
Acknowledging the relevance of past experiences is essential in unlocking the secrets of effective decision-making.
In this context, anchoring is related to how our past decisions or experiences can act as reference points that influence our current decision-making. When facing a new decision or judgment, the Anchoring Bias can cause us to rely too heavily on our previous choices. (You can also read some more on the Status quo bias in this sense)
Some examples we can all relate to:
- If we’ve made a particular decision in the past that turned out well or felt comfortable, we may be inclined to repeat that choice when faced with a similar situation, even if there are better alternatives available. Do you own an iPhone or a Macbook? If so, I don’t need to explain further 🙂
- Past choices and experiences can lead to a fixed mindset, where we become resistant to change and prefer to stick to what we know, limiting our openness to new ideas and possibilities
- When evaluating new options, we may anchor our judgments on previous outcomes, even if they were based on different circumstances or variables. This can lead us to overvalue or undervalue certain choices in the current context.
- Previous choices can also be influenced by social factors, such as peer pressure. Anchoring to what others have chosen in similar situations may lead us to follow the crowd without thoroughly considering our own preferences.
So what to do?
Take the time to critically reflect on why you made certain decisions in the past and whether they are applicable to the current situation. Consider if there are new factors or information that should be considered; be open to exploring new options and approaches, even if they differ from your previous choices, possibly engage with people who have different experiences and viewpoints.
Some Takeaways
The Anchoring Bias affects how we process information and make decisions. Understanding its impact and identifying ways to mitigate its influence can lead to more informed and rational decision-making, ultimately contributing to better outcomes in both personal and professional spheres. By becoming mindful of this bias and employing strategies to counter it, we can enhance our ability to make well-balanced and objective judgments.
And now…MEME time!
