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anchoring effect

Contributor(s): Trea Laverly

Anchoring effect is a form of cognitive bias that causes people to focus on the first available piece of information (the "anchor") given to them when making decisions. It particularly affects decisions regarding numerical values like pricing, both value-based and cost-plus, since customers tend to decide on amounts skewed toward the anchor value. Similar to framing effect, how the anchor value is presented can influence a customer's buying decision.

Anchoring effect is often taken advantage of in sales situations to set prices for products. Setting a price too high might normally deter a potential customer from making a purchase. However, when the vendor then advertises the lower sale price (which may be the price they had actually intended to sell the product for), the original higher price serves as an anchor, making the new sale price seem like a much better deal. The customer will then be much more willing to make the purchase than they would have been if the product had been marked with the lower sale price originally. This can hinder the customer's ability to find a fair and reasonable price.

An example of this is an advertisement run by the magazine The Economist, which offered three subscription options: a web-only subscription, which cost $59; a print-only subscription, which cost $125; or both web and print, which also cost $125. Given these options in a study, no subjects chose the print-only subscription, which was the clearly inferior option, and a majority chose the dual print and web subscription. However,  when they removed the print-only option, the majority of people chose the web-only subscription. Even though nobody was interested in the print-only option, it served as an anchor to make the more expensive, dual subscription seem like a much better deal.

Anchoring can also affect negotiations for prices or salaries. The first suggested price will set a precedent for all subsequent suggestions, including the final price. Therefore, the seller will usually set a high price first. For salaries, an employer might anchor with a low salary offer to a prospective employee in hopes that the employee will counter with a higher salary request that makes both parties comfortable. Anchoring effect has widespread influence, including on professionals who are well-educated on the related topic (like real estate agents evaluating the value of houses) and people who are aware of the potential effect of anchoring and know to adjust for it.

This was last updated in March 2017

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