![]() ![]() I find that when I seek out the advice of my friends and peers and force myself to be explicit about my reasoning, it can help expose an anchor. Talking through decisions can serve the same purpose. Writing down the information helps me evaluate its reliability and eliminate anchors that aren’t relevant. When it comes to a big decision, for instance, I often write down all the factors involved. When we are clearer about the evidence, we are less likely to get hoodwinked. The first step is gaining clarity around the data. Companies will often perform such “markdowns,” even though there’s no reason that the couch should have been priced at $800 in the first place. So, for instance, I’ll see a low-budget couch “originally” priced at $800 that has been marked down to $200 to make the couch seem like a great deal. One of my favorites is big box stores that will offer huge “discounts” off grossly inflated “original” prices that have little to do with the item’s actual value. It’s a way to make customers feel like they’re getting a good deal. Don’t Let Anchors Drag You DownĪnchoring is everywhere in the retailing world. Here are three strategies that can help make sure that your thinking is clear and well-grounded - but not anchored. While anchoring can lead to serious and costly mistakes, there are also ways to use the bias to your advantage. Why? Because the stock price - the anchor - enhances the company’s perceived value. ![]() So, if two companies have the same financial profile except Company X has fewer shares at a higher price than Company Y, then Company X’s shares will sell better over the long run than Company Y’s. This occurred even after controlling for factors like the number of stocks available and other issues of corporate governance. Led by a team at Ghent University, the study showed that investors valued firms more highly if the firms had higher stock prices. In particular, a recent study shows that anchoring is far more prevalent in the financial world than previously believed, with substantial anchoring effects influencing performance in the stock market. One study found that “ estimates of an athlete’s performance were influenced by the number on his jersey.” In other words, people thought that an athlete with a higher jersey number was better than an athlete with a lower number, all else being equal.Īnchoring affects all kinds of decisions, even those made by experts who should know better. Studies show that anchoring effects persist no matter how weak the connection between the anchor and the actual decision. In a landmark study, the researchers found that spinning a wheel of fortune in front of participants and anchoring them with random numbers influenced their answers to simple questions, like “what is the percentage of United Nation countries in Africa?” In the 1970s, psychologists Amos Tversky and Daniel Kahneman showed the power of the anchoring effect. In my case, the prices on the adult menu shaped - or anchored - my judgment about the value of the items on the children’s menu. Our minds give too much weight to initial impressions or numbers that influence - our subsequent thoughts. According to researchers, anchoring is when people rely on irrelevant but easily accessible facts to make judgments. My faulty reasoning is the product of anchoring, a cognitive bias that can undermine our critical thinking. After all, I estimated the cost of the pasta based on the adult menu, not the actual cost of making some bow-tie noodles and serving them with a red-tinted sauce. If I think again for a moment, though, the deal isn’t really a deal. But the items on the children’s menu are usually less expensive, and I’ll think to myself: Wow, good deal. Oftentimes, the menu is pretty similar, with the same pasta and tomato sauce. It happens just about every time I go to a restaurant with my daughter. ![]()
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