Anchoring: How Psychology Can Influence Our Money Choices

Anchoring can influence many financial choices

Discounts are often enticing for many shoppers.  The idea of getting something for less than other alternatives – or, the particular item itself at a “sale” price – can bring about the feeling that one is getting a good deal.  Sometimes it might be the case, but other times it could be anchoring influencing your perception of the situation.

Anchoring, as you might know, doesn’t always refer to boating:) Rather, it sometimes refers to the notion of excessively focusing on a particular attribute, or set of information, when making a particular decision. This latter aspect of anchoring can come into play for many of us in terms of our finances. Anchoring can factor into pricing decisions, as well as how consumers handle different choices.

Here are three examples of anchoring:

  1. Shopping. Let’s say you are shopping for a new pair of jeans, and you see a nicely branded pair of jeans at $100 a pair. Pricey, right? For many people it would be. However, what if you saw a sticker noting that the jeans are 50% off! Hey, then you can get the $100 jeans for “just” $50! These jeans that seemed so expensive now seem like a bargain – an opportunity to get an expensive item for $50 less and half price. However, are they really even worth $50 or anything close to it? Would you normally pay that much anyway? A shopper could be impacted by anchoring here.
  2. Dining. Suppose you’re at a nice restaurant, and you see a number of entrees priced at $25 each. Then, you see a hamburger priced at $12. Wow, just order the hamburger and you can enjoy the nice atmosphere and get a bargain. After all, it’s so much cheaper than everything else on the menu! Well, in this case the diner might be impacted by anchoring.  While the burger might seem like a good deal, why does anybody need to spend $12 on a hamburger in the first place? It’s probably not a deal, and might seem so due to anchoring.
  3. Hiring. Imagine that you’re interviewing someone for a job, and you see on her resume that she attended an Ivy League school for their undergrad studies. Also, she’s very presentable, warm and friendly when you first greet her. Based on these factors, you might assume that she’s really bright, talented, and has a lot of potential.  What if she ended up giving mediocre answers in the interview, and didn’t seem to understand the job for which she was interviewing? Would you look past these red flags, and still think that she’s highly capable? If so, you might be falling into a situation of anchoring on to initial impression.

There are many other situations that can be impacted by anchoring.  Some of these involve money, and some might even be relationship-centric. Either way, it’s important to recognize when we might be anchoring, and then apply critical thinking to make a more informed, logical decision.

My Questions for You

Can you think of any times where you have noticed attempts by businesses to incorporate anchoring into their pricing strategies?

Have you ever fallen into the trap of getting anchored to a certain price or attribute when making a decision?

How do you avoid letting the concept of anchoring impact you when you make decisions?

 

Comments

  1. says

    Yeah, lots of stores pull these sorts of tricks. Off the top of my head, I’m thinking of Joseph A. Banks (actually, it’s common in clothes shopping) which has rotating sales every week of the year. I enjoy their clothes, but when I am shopping, I either have to wait for JAB to rotate to the category of clothes I want, or buy elsewhere.

  2. says

    I wrote a post about this once before. Anchoring works very well on people who are not aware of what is going on. I see it all the time in retail, but I have to remind myself that something is only worth what I want to pay for it, not what they say it was worth before it went on “sale.”

    • Squirrelers says

      Eric – good point on the “sale” prices that make us think we’re getting a deal. The value is based on what matters to us, not a comparison to artifically high “regular” prices!

  3. says

    A financial advisor friend of mine told me just yesterday that he was going to raise his fees. The way he does it is by offering a “Cadillac” option that nobody chooses and attaching a high price tag. Then, when he places his “middle price” option higher than it was before, nobody notices because it seems like such a discount when compared to the “Cadillac.”

    Very similar to your hamburger story.

    • Squirrelers says

      Average Joe – interesting that an advisor is taking this approach. Seems just like what I’ve been talking about!

  4. says

    My brother started a chain of furniture stores using that marketing technique. He marked it up to mark it down. Everything was on permanent sale. It worked very well!

    • Squirrelers says

      Jai – wise words, in many cases that probably applies! I think it might apply in terms of people taking on mortgages with the justification of tax benefits, of course percentages are lower.

  5. says

    its so true that is seems like people allow anchoring them to make bad judgements or maybe its there excuse. I always tell my wife that it not a bargain if you wouldn’t have bought this at a regular price. I dont care how much of a sale something has I ask myself was this something you want when it wasnt on sale? And remember stores sale make nice profits on things that are ON SALE that lets you know how overpriced they were to begin with.

    • Squirrelers says

      Thomas – good point on relating bargain status to what one would actually do if stated as a normal price. Things aren’t bargains just because somebody else tells us they are!

  6. Squirrelers says

    Molly – funny how that works, isn’t it. It takes conscious effort sometimes to avoid falling into the trap.

  7. says

    As many have already said, it’s a practice stores and sites have used for years. A big one is the free delivery or discount pushed by sites if you spend at least a certain $ amount. People see “free” and assume it has to be worth it.

    • Squirrelers says

      JP – the reality that the psychological aspect of these tactics work is quite interesting….and apparently time tested!

  8. says

    What’s fascinating is how many people think buying things on sale is actually virtuous. We view thrift as a virtue, and hence buying things on sale is also a virtue. Stores know this very well. Whenever you can turn consumer spending into a virtue (which green marketers, incidentally, do very well) you can sing all the way to the bank. I’m trying to teach myself that if I wouldn’t pay full price for an item, I probably shouldn’t buy it on sale either. If I actually would pay full price, and walked into a store intending to do so, then a sale is a bargain.

  9. says

    If you haven’t already done so- you should read the books Buyology by Martin Lindstrom and Predictably Irrational by Dan Ariely. They both talk about price anchoring (& a ton of other useful info). Fascinating stuff!

    This concept is also the reason YOU should always be the first one to make an offer in a negotiation. Without even knowing it, the other person will adjust their counteroffer based on your offer!

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