It has been estimated that an average adult makes more than 35,000 decisions per day. And many of these decisions are not made objectively. To continuously interpret the sheer number of inputs we receive throughout the day, we often use simplified information processing strategies called heuristics, which can in turn generate systematic errors known as cognitive biases.
A cognitive bias, or judgmental bias, occurs when our subjective perceptions distort our rationality, making it much more difficult to find a sensible solution. Unfortunately, judgmental bias can have significant consequences if it ends up dictating our actions.
Anchoring bias is one such example. And, like other cognitive biases, anchoring bias can skew our decision-making process. For example, doctors often encounter anchoring bias when making medical diagnoses. Even experienced doctors will sometimes rely too heavily on the first piece of information they receive about a patient and fail to see the whole picture, which can lead to an incorrect diagnosis.
As biases are unconscious and usually automatic, it’s tough to avoid anchoring bias unless you know what to look out for. However, once you know how to cope with and overcome anchoring bias, you will be in a position to use this common cognitive bias to your advantage.
What is anchoring bias?
Anchoring bias, or anchor bias, describes how we tend to rely too heavily on the first piece of information we get. When we are making a decision, our first reference point often acts as an “anchor.” Because we value this piece of pre-existing information over subsequent ones, our final decision is sometimes not as rational (and perhaps, beneficial) as it could be.
How heuristics can be helpful
Anchoring bias usually occurs when we try to figure something out through heuristic methods. A heuristic approach to problem-solving uses shortcuts to make decisions when an optimized procedure is impractical or impossible.
As previously mentioned, heuristic methods can be affected by biases. But it’s not all doom and gloom. Heuristics can be incredibly helpful in any decision-making process. For choices where you don’t know all the risks involved, heuristics have been proven to be more accurate and require less effort than formal models.
In addition, heuristics aren’t a last resort. When you have comprehensive knowledge of every action and the probabilities of their outcomes, heuristics are less helpful. But in real life, it’s rare to be able to make decisions with this level of predictability, especially in business.
The history of anchoring bias
Anchor bias is a relatively new concept in applied social psychology and behavioral economics. Although anchoring effects were first described in psychological research in the 1950s, the term anchoring bias first appeared only in the 1970s.
Sherif, Taub, and Hovland’s psychophysics study
Anchoring was first described by Muzafer Sherif, Daniel Taub, and Carl Hovland in their 1958 experimental psychology article titled “Assimilation and contrast effects of anchoring stimuli on judgments.” Their research focus was on psychophysics, which is the study of the relationship between the physical stimuli in the world around us and the psychological process of perception.
These researchers found that when judging the weight of various objects, the weight of the first object significantly affected participants’ judgment of other objects. They described this first object’s weight as an anchor.
Tversky and Kahneman’s paper on the anchoring and adjustment heuristic
It wasn’t until 1974 that the term anchoring bias was coined by friends Tversky and Kahneman in their article “Judgment under Uncertainty: Heuristics and Biases,” which was published in the prestigious international journal Science Magazine. This was the first time that specific heuristic models were named and theorized, including the anchoring heuristic.
As part of this article, Tversky and Kahneman conducted various experiments, including one where they asked participants to estimate what percentage of African countries were part of the United Nations. Before asking for these estimates, they spun a roulette wheel divided into sections numbering 0-100. However, this wheel was rigged to always land on just 2 numbers: 10 and 65.
Following the wheel spin, participants were asked to say whether they thought the percentage was larger or smaller than the number on the wheel, and then what they thought the correct percentage might be.
For those whose spin had landed on the number 10, the median estimate was about 25%, but those who landed on a 65 gave a significantly higher median estimate of 45%. Even though they believed that the wheel was just providing a random value, seemingly irrelevant to the task at hand, they anchored their estimates in the number shown to them.
Explaining the mechanisms behind anchoring bias: Common hypotheses
Though the anchoring effect is very well documented, a literature review shows that science has not yet understood exactly how anchoring bias occurs. There are currently 4 major hypotheses that contribute to (but don’t define) our understanding of anchoring effects. Understanding how anchor bias functions according to current psychological science is key in helping us successfully circumvent its effects.
The anchor-and-adjust hypothesis
In their study on heuristics, Tversky and Kahneman put forward their anchor-and-adjust hypothesis as a means of explaining anchoring bias. According to their theory, we take the first value given to us as an anchor on which we then base our estimates.
This connection means we don’t adjust sufficiently along the way, so our final answer is always skewed further toward the anchor than it should be. Conclusive evidence is still lacking for why we don’t adjust enough when given more information, although one paper suggests that once a plausible answer is reached, rather than looking for more evidence, we stop adjusting altogether.
Selective accessibility theory
Selective accessibility theory states that when we are given an external anchor—a reference point provided by others—we automatically consider it a possible viable answer. As a result, our brains start looking for all available information to confirm this anchor as the correct answer. According to selective accessibility, anchors will be given more weight in the decision-making process because we will subconsciously attempt to gather evidence in their favor.
Primacy effect
This hypothesis is based on the idea that we are more likely to remember the first thing we learn about any given subject. As this initial anchor leaves the strongest impression in our minds, we end up comparing all subsequent information to it and fail to give it the same level of consideration.
Attitude change from an initial value
Some psychologists believe that the first piece of information we are given to introduce us to a question can cause a change in attitude. We will now believe that answers similar to the initial value are more likely to be correct. This causes us to look for closely related attributes in later values or solutions, which pull us back toward the initial anchor.
What factors influence anchoring bias?
Since anchor bias was first identified, plenty of further research has been conducted into the factors that make anchoring effects more or less likely.
Working as a group
Research has shown that when a group tackles a problem involving anchoring bias, the bias has less impact on their decisions. Each person has their own internal anchors—individual reference points based on their beliefs, experiences, or contextual clues—which weigh in when faced with a question, problem, or decision. Within a group, the pre-existing internal anchors of each person act as external anchors when examining the question at hand.
This is called the competing anchor hypothesis, and it can have a significant effect on our decision-making process. Working in a group can help us question our initial impressions of any given problem through our individual differences in opinion and consider what other factors might be at play, thereby reducing anchoring bias.
Business intelligence
Business intelligence (BI) describes various methods of data analysis and information management. These tools help businesses make better forecasting decisions by processing and interpreting huge amounts of information, ensuring that final decisions are not based on a narrow knowledge base.
Research into cognitive bias in BI systems shows that when given a “spurious” anchor, the anchoring effect was reduced. But if the anchor was a plausible value, even with highly sophisticated technology, the computer systems showed signs of anchor bias. Even decisions made with the help of complicated tech aren’t free from human bias!
Mood and personality traits
Studies have shown that people in sadder moods are generally more likely to make accurate estimates. But when it comes to anchoring bias, the opposite is true, with people in a more positive mood being less affected by the bias.
Similarly, in research based on the “big five” personality traits, it seems that agreeable, open-minded, and more neurotic people won’t be as strongly affected by the anchor bias compared to conscientious or extroverted individuals.
So, when faced with a decision that might be prone to anchoring bias, you’re more likely to make a better decision with a happier, more open-minded, and more agreeable team.
Expertise
How does expertise influence judgmental anchoring? Studies show that being knowledgeable about the question you’re facing is proven to help. That said, experts will still be susceptible to anchor bias, even though knowledge of the subject lessens the anchoring effect.
How to avoid anchoring bias in decision-making
When we rely too heavily on potentially irrelevant anchors, it can have a significant negative effect on our decisions. Avoiding anchoring bias is very tricky, but its effects can be mitigated. By building on our understanding of the influencing factors at play, here are 3 key steps you can take to avoid anchoring bias in your next big decision.
1. Be aware of the anchoring effect
The best possible way to counter anchoring bias is to be aware of its existence. As a cognitive bias, the anchoring effect is inherently subconscious, so bringing it to the forefront and educating your team on how it works is an essential first step in avoiding it.
2. Question your reference point
You can use your knowledge of how anchoring bias psychology can be mitigated to your advantage. For example, we can be more critical when examining the initial value received by giving equal consideration to alternative reference points. This is one way of lessening the effect of an anchor.
As we have discussed, working as a group, having access to a wide range of relevant data through BI, and having access to a subject matter expert all allow you to question the anchor and reduce the extent to which anchoring affects your decision-making.
3. Be open to new information
Though rigorous interrogation of existing information is important, it’s equally valuable to be open to future research findings. Understanding the value of each new piece of data will ensure that you don’t rely too heavily on your initial research and conclusions.
How to use anchoring bias to your advantage
The best way to counteract the enigmatic anchoring effect is an awareness of how this bias works. But what are some real-world examples where knowing how it works can benefit you?
Negotiations
When it comes to strategic discussions, especially where money is concerned, anchoring can have a significant impact on the final outcome. The initial bid acts as a first anchor and the second bid as a counter-anchor. These are the two values that set the tone of the entire negotiation.
Somewhat unsurprisingly, the party that sets the first anchor tends to do better in the negotiation. An example of this process at work is salary negotiations. If the initial number offer is set low, the employee is more likely to accept a lower salary than if they were offered more money at the start.
Sales
Another example of anchoring bias in action is in sales. When shown what a product or service costs before the promotion alongside the sale price, the initial price acts as an anchor. Clients that look at both prices will consider the new, cheaper price a better deal than they would have if only the sale price were visible. Showing both makes them more likely to buy what you are selling.
Similarly, a car dealer might show a client more expensive models before bringing them to the cars that sit within their price range. Through this comparison, the client is more likely to believe that the car they eventually settle on is well priced. This method can be used across sales, for example in website layouts, showing more expensive items or services first.
A third example of anchoring at work in sales comes from research conducted at Ohio State University, which demonstrated that even though we’re all aware of the $0.99 price trick, it still works. The way this pricing trick functions is that our brains take the first number of any price as an anchor, so that even if it is just one cent less expensive, we’re 50-100% more likely to buy it.
The Ohio State researchers went one step further, using this premise to show an increase in the perceived price difference between a regular and premium option when the regular option is priced below a round number.
Their experiment centered around coffee prices, with a small coffee priced at $0.95 and a large at $1.20. At these prices, only 29% of customers opted for the larger size. But when the small coffee was bumped up to $1 a cup, and the large one to $1.25, even though there was still the same $0.25 difference between the two, 56% of customers went for the bigger cup of coffee.
This research proves that anchoring bias works off the first number we see in a price, and this works so well in fact that if we want to encourage consumers to upgrade to a premium option, we should keep the lower price above the nearest round number rather than below.
Marketing
It’s not just sale prices that use anchor bias to influence customers. In their 1998 article “An Anchoring and Adjustment Model of Purchase Quantity Decisions,” Brian Wansink, Robert J. Kent, and Stephen J. Hoch looked at various situations in which a consumer might be persuaded to buy more through anchoring.
One experiment involved the soup aisle of a supermarket. At the start, the researchers placed end-aisle displays advertising Campbell’s soups for just $0.79 a can. With this information alone, customers bought 3.3 soup cans on average. But when the researchers added a sign informing shoppers “Limit of 12 cans per person,” sales went up to an average of 7 soup cans per person.
The purchase limit sign looks like a measure to stop the shop from selling out of a particular product, but the limit is really an anchoring tool influencing shoppers to buy far more than they would have without it.
Another marketing method that employs anchoring bias is the subscription bundle. For example, a magazine might list three subscription options:
Online subscription: $79
Print subscription: $215
Online and print bundle: $215
When presented with these options, consumers are unlikely to purchase a print-only subscription. However, they are more likely to buy the bundle than they are to simply buy the online subscription. As both the bundle and the stand-alone online subscription cost the same, the former seems to be a much better deal. This bundle method can be used with a variety of different products and services.
First impressions count
Anchoring bias proves that first impressions count for a lot. When faced with your next big business decision or negotiation, consider how it might help you turn the tables in your favor.