Anchoring Effect — having your thinking tied by a random number

You run a small company. Employees have a free hand. You’re championed as a leader.

Until, a sales person stays at a $500-a-night room and a designer buys a swanky monitor for $440. (Numbers are arbitrary; change them up to what’s acceptably preposterous for you.)

You step in. You set up a policy: All discretionary purchases capped at $200!

At least there won’t be any egregious expenses now, you think.
You’re right. But…

You’ve ignored the anchoring effect.

Capping at $200 eliminates larger expenses but pulls up the mean closer to the limit of $200. The policy deters serious offenders but encourages the rest to aim higher simply because it is now allowed.

We’re highly susceptible to suggestion. $200 biases our thinking to lend more weight to the anchor than is rational.

Anchoring effects are everywhere.

👉When your boss asks for a project completion estimate, you blurt out a random date, with the caveat that it is tentative. Until the project shoots past the date and your boss is less than happy, even though you’ve fared much better than other similar projects in the org.

👉You’re told during annual appraisal that the mean org-wide hike is 5% before you’re presented with your increment of 8%. Without the 5% anchor, you probably thought you deserved a lot more than 8% but now you feel a little better that you’re above average.

Anchors impose on us tunnel vision. They draw our attention to something specific during uncertainty. So we see few alternatives beyond the anchor. We may adjust the anchor until it seems plausible. But the adjustment tends to be not enough.

You don’t have to be at the receiving end of anchors. You can make them work for you too.

💡Making the first offer can be beneficial in ambiguous situations, like in a price negotiation. ‘We have budgeted X for this position’ OR ‘In the past I’ve charged Y for such projects’

💡Or you can drive up sales via arbitrary rationing. ‘Limit of 12 Maggis per person’ somehow makes shoppers a lot more than they would have without the random anchor of 12.

The best defense against anchors is to reject them as presented to you. Tell yourself and consider the full range of alternatives. Seek information that takes you away from initial impressions.

That takes work but you can only get better, right?