What is the anchoring effect?

The function of the anchor on a ship is to keep the vessel from sailing away. But in the case of the ‘anchoring effect’, it keeps the mind from sailing towards different starting points for the process of decision-making. It is a term that refers to the phenomenon where one uses a single piece of information to anchor and influence their decision-making.

The drawbacks of a single point

A good detective never claims a case to be concluded at the first clue. If one were to use a single piece of information to come to a conclusion, it is highly likely that their conclusion would be false or hold many errors. That is the base of the anchoring effect. But in this case, the anchoring point can also be completely irrelevant to the overall situation. The effect is considered a cognitive bias wherein a lack of full information hinders one’s ability to make decisions. Take this, for example. A person sees a nice red shirt at a store, but they are told that it costs ₹500. Taking 500 as the anchor price, they decide to keep shopping and come upon the same red shirt for ₹400. They immediately purchase, since it saves ₹100. However, they see the same shirt being sold in another store for ₹200! The reason for this fumble is simple. Because the person believed that ₹500 was the anchor price, they came to the conclusion that any other price for the shirt would be close to that number. In order to avoid a situation similar to this, it is important to ensure that one does not let a single piece of information completely influence their decisions. The anchoring effect may help people make decisions faster, but there are many cases where the effects hold more drawbacks than perks.

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The discovery

The story of the anchoring effect’s origin is a story of multiplication. It was first theorised by Amos Tversky and Daniel Kahneman. During one of their earliest studies, they conducted a small experiment where participants were made to separate into two groups. Both these groups were provided with the same task, but were given different instructions on how to go about it. The task assigned to both groups was to calculate the product of all the numbers from one to eight within the span of five seconds. 

The first group was asked to calculate it as 1 x 2 x 3 x 4 x 5 x 6 x 7 x 8.

The second had to calculate through the flipped equation of 8 x 7 x 6 x 5 x 4 x 3 x 2 x 1. 

Since they were given only five seconds to come up with the answer, the participants could only make an estimated guess based on the multiplications done for the first few numbers. The group that calculated the sequence, which started with smaller numbers, gave small answers, with the estimated median result being 512. For the group that started calculating the larger number, their guesses came to an overall estimate of 2,250.

There were many other studies conducted on the anchoring effect, connecting it to marketing and finance.   

Applications in reality

The anchoring effect can be witnessed within any normal decision-making process, where one piece of information seems to hold great value and is thus placed as the anchor for decisions being made. One common sector where this can be witnessed is in the marketing sector. Especially for when high-quality items are being sold. The base price given for the product is displayed at an extremely high rate, and when the customer starts asking for discounts or offers. When the discount is provided at a seemingly reasonable rate, it will push the customer to purchase it, not knowing that there may be other similar products with a much lower base price. 

Anchoring is also said to be a strong factor of influence in negotiations, real estate, etc.