Understanding the anchoring effect can save and make you money
You've seen the anchoring effect in action a million times, usually in the form of a suggested retail price. When you see a purse with a price tag that claims it normally sells for $400, but is marked down to $200, that little "yippee!" you feel inside at the prospect of getting a bargain? The anchoring effect. The seller simply told you that the purse was worth $400, and we tend to accept this line of bull because we are basically a trusting people and trained to use price as our gauge of value.
The anchoring effect is simply an error in perception. In the absence of information, we allow the merchant to establish the parameters of value in our mind by showing us a higher price, then reducing it via sale signs, tag markdowns and 'special deals." A recent study suggest this tendency is stronger in people with the personality trait of openness-to-experience. For those without a psychology degree: This is one of five major personality domains, and involves active imagination, aesthetic sensitivity, attentiveness to inner feelings, preference for variety, and intellectual curiosity.
So if this describes you, be especially vigilant about recognizing and fighting the anchoring effect. Perhaps this accounts for Apple's success at selling expensive toys to early adopters; they have no anchor except the one Steve Jobs gives them.
I fall into this trap frequently. If I were shopping for a cordless drill, for example, out of habit I would find the most and least expensive options, then choose one that is priced in between. A shrewd business owner, knowing this, will stock at least one top-end item, to anchor my thinking and elevate my acceptable price point.
How can you overcome the anchoring effect when you shop?
- Prepare. For commonly available retail items, set your price anchors before you leave home. Find out what they sell for on Amazon, or check the price of similar items with Consumer Reports. Check out newspaper ads. Know before you step on the car lot or enter the outlet mall what a fair price is for the items you are seeking. The cell phone is a great adversary of the anchoring effect; too. While in the store, you can scan a bar code and upload it to RedLaser or another bar-code-scanning and pricing app which will respond with a list of who else is selling the same item and for how much.
- Don't focus on the price first; focus on other details. When shopping for clothes, for example, compare the quality of fabric and construction of several items that interest you. Now look at the sales prices; does the increase in quality and the increase in price seem consistent?
- When you are selling a car, be sure to set an anchor first; for example, write that your car is identical to one that just sold for $8,000, but you are selling it for $6,000.
- In a yard sale, put on price tags at double the price you intend to sell them for, then put up a large sign reading "50% off all ticket prices today."
- If you are mowing lawns this summer, when asked for a quote, highball it. If the prospective customer balks, you can offer a "special price." He'll probably accept, happy that he's getting a $25 mowing for $20, never realizing you've played the anchoring game on him.