July 10, 2013 | 162 views
Person to Person
The anchoring effect
Your teen is in desperate need of a new wardrobe. You set a day for a shopping trip. Lucky you. It’s not long until your daughter finds the perfect pair of jeans. Great, you tell her — until you check the price tag, $149.95. “Sorry honey, no deal. Too expensive. I’m sure you can find another pair of nice jeans that’s less expensive.” “No, I love this one; I have to have it.” Her voice has become a screech when a saleswoman approaches. “Do you know that these jeans are on sale, this week only, marked down 25 percent?” “Mom, that’s perfect. If we get four pairs of jeans, that’s like getting one free.”
Daughter’s delighted. Mom feels conned. What’s happening here? Is it just that daughter’s a spoiled brat and mom’s a tightwad? Sorry, it’s not that simple. To understand what’s going on here, you need to appreciate the power of the “anchoring effect.”
How do you know how much you should pay for something? How do you know what’s a deal and what’s a rip-off? You need some sort of reference point. A cue to help you evaluate. For your daughter, the reference point is $149.95. The discount makes it a real bargain so why is mom still giving me a hard time?
Your reference point, however, is quite different. You remember, when you were a kid, a great pair of jeans cost no more than $50. Sure, prices have gone up but three times the price? Crazy! No, in your mind, these jeans are way too expensive.
The anchoring effect is a cognitive bias that influences you to rely too heavily on the first piece of information you receive. And it’s not just a factor between the generations. Stores use it all the time to convince you to buy.
The manufacturer’s suggested retail price for a new Lexus is $39,465. You negotiated a price for $35,250. You feel terrific. You believe you got a great deal. The anchoring effect has worked!
You paid $80,000 less for your home than the initial price offering. Were you a great negotiator or is this one more example of the anchoring effect?