## Wednesday, February 1, 2017

### Anchoring

Anchoring is a cognitive bias that describes the common human tendency to rely too heavily on the initial piece of information offered (the "anchor") when making decisions.

When making a decision, it is believed that people often make "estimates by starting from an initial value which is adjusted to yield the final answer. The initial value, or starting point, may be suggested by the formulation of the problem, or else it may be the result of a partial computation. Whatever the source of the initial value, adjustments are typically insufficient. That is, different starting points yield different estimates, which are biased towards the initial values."(1)

Judgement Under Uncertainty Study
Amos Tversky and Daniel Kahneman published a famous study on anchoring in the early 1970's. They had participants spin a wheel marked 1 to 100 which unknown to them was rigged to always stop on 10 or 65. They then asked if the percentage of African nations in the United Nations was higher or lower than the number the wheel had landed on. Finally, they asked the participants to estimate the actual percentage.

Tversky and Kahneman found that the number the wheel had landed on had a pronounced effect on the answers the subjects provided. When the wheel landed on 10, the average estimate given by the subjects was 25%. When the wheel landed on 60, the average estimate was 45%.(1)

Real World Example of Anchoring
Sales Negotiations - In a negotiation, the initial price offered can act as an anchor, setting the standard in the mind of the potential buyer.

For example, imagine a negotiation for a used car. In scenario one, the salesman asks for \$15,000. The buyer haggles with him and they end up agreeing on \$14,500. In scenario two, the salesman asks for \$18,000. The two negotiate until settling on a price of \$15,500.

In both examples, the sales person anchored the price from which to negotiate in the mind of the buyer. Interestingly, even though the buyer in the first scenario paid less, the buyer in the second scenario is likely to feel he got the better deal as he had negotiated a 'deep discount.'

Prevalence and Susceptibility
The anchoring bias has been well documented and demonstrated in a variety of domains.(2)  Findings suggest that it is a robust psychological phenomenon and can be difficult to avoid even among those aware of its influence.(3)

Though research findings are somewhat mixed, generally speaking it seems that knowledgeable people are less affected by anchoring. Hence, the more unfamiliar the decision maker is with the problem, the higher the anchoring effect.(2) This seems intuitively true in that a knowledgeable person has access to information with which to judge the plausibility of the anchor.

(1) Judgement Under Uncertainty: Heuristics and Biases: Tversky & Kahneman

(2) A literature review of the anchoring effect

(3) A New Look at Anchoring Effects: Basic Anchoring and Its Anteceents

CIA: Biases in Estimating Probabilities

Anchoring: Wikipedia