Cognitive Biases-Anchoring Effect

After watching a video on cognitive biases, the author explained 12 cognitive biases and how it affects decision making. Of the 12 biases mentioned, I noticed I was prone to anchoring bias or anchoring effect, which is the over-reliance on the first piece of information learned about a subject which leads to a tendency to jump to conclusions. This ends up having a negative impact on the quality of my decisions.

Examples of anchoring bias

If you first see a T-shirt that costs $1,200 — then see a second one that costs $100 — you’re prone to see the second shirt as cheap. Whereas, if you’d merely seen the second shirt, priced at $100, you’d probably not view it as cheap.

Also, if we take an example of a car salesman. He is trying to sell a Ford Focus for $20,000. The customer comes in and decides they like the car and is willing to pay up to $15,000. After discussing the details of the car, the salesman makes an offer to the customer of $22,000. This is the anchor.

The customer hears the $22,000 price and thinks ‘oh, that’s way out of my price range’. However, at the same time, the customer has anchored their valuation of the car to $22,000.

The salesman then says ‘We can do a deal especially for you, we can go down to $19,000 if you buy today’. ‘That’s an excellent deal, it’s a bit out of my price range, but I can’t miss out on this offer’, the customer replies.

As the customer anchored their price expectation of the car at $22,000, anything underneath that seems like an excellent deal.

Managing the effects of anchoring

Anchoring is not all bad. However, a poor anchor as a result of insufficient information or research will impact decision making. My article on critical thinking as a decision-making tool, which explains principles which help to improve thought process in order to make decisions or profer solutions which have been subjected to high intellectual to avoid biased judgments.

Overcoming anchoring effect

Acknowledge it

Reflecting on my decision-making history, I noticed this bias in my decision making and will make sure to keep in mind the sneaky tendencies of anchoring bias by asking myself if adequate consideration has been given all the information available, or if I am giving undue weight to some prior reference point.

Set your own anchor (and adjust as needed)

Anchoring can be beneficial as long as the anchor has been scrutinized and subjected to adequate intellectual standards. Be sure to stay flexible, because overtime understanding of a particular subject may improve and will require our anchors to be tweaked or adjusted.

Step back and take your time

There is a tendency to make biased judgments due to impatience. Making out time to make decisions could be beneficial, except an immediate decision is imperative. Patience allows time to gather information and understand the full picture before making an informed decision. The length of time taken to make decisions doesn’t reduce the quality of decision making.

Sources

Anchoring bias. (n.d.). Retrieved from Corporate Finance Institute web site: https://corporatefinanceinstitute.com/

Mindtools content team. (n.d.). Avoiding Psychological Bias. Retrieved from Mindtools: https://www.mindtools.com/

Riepe, M. (2018, April 20). Weigh Anchor: Overcoming Anchoring Bias. Retrieved from Charles Schwab web site: https://www.schwab.com