What is it: anchoring is a heuristic that affects our decisions, based on an existing initial reference point, value or position…
I’ve just invested in ACME PLC at £10/share because last week they were £20/share, so I’ve got them 50% cheaper…”
Overview
How often are we told that we can have that ‘must have’ product (that’s a framing bias) now, and it’s only £75 as opposed to the ‘real’ price of £100? It’s also only available for a limited time (that’s the scarcity bias). It’s used in almost EVERY product advertisement and seems to be the default go-to for marketing campaigns. It sounds great though doesn’t it? I can save £25 from the ‘normal’ price?
This is probably the most common example of the anchoring bias in our daily lives and it’s used ad neausea. However, the anchoring bias occurs in many places and it can significantly affect our decision-making unless we’re alert to it.
What can we do to avoid this?
In the case of the financial markets, we can do two things:
- look at equivalent companies – this is likely to give you a truer picture of what a business or stock ought to be valued at
- look at the P/E ratio, this will tell you whether a stock is a bargain or not
In the case of consumer products:
- ask yourself if you would have purchased at the higher price – if not, you’re probably seeing the value of the saving, not the value of the product
- look at the dates for the ‘Was’ price, if it’s a very short period, it’s probably been price-established artificially high
Examples
- Hygiene products are always sold with a ‘Kills 99% of all germs’ as it’s far better received that saying ‘Our product kills all but the most resistent 1% of germs’.
- Prices are often reframed, according to the ‘Law of 100’; quite simply, anything less than £100 is more appealing quoted as a percentage. So 10 percent off a £10 good is more appealing than £1 off.
- One of the classic ‘frames’ is the scarcity effect. When we’re told ‘Don’t miss out’ or ‘Your last chance to save’, we instinctively react as opposed to being told we have something to gain from buying a product; fear of losing out is more powerful than the desire to acquire something.
