Anchors Away

According to one of my new AI friends, “Anchoring is a cognitive bias in behavioral finance that describes how people use a first piece of information, or ‘anchor’ as a reference point for making decisions. This bias can affect many areas of financial decision-making, including investing, budgeting, and spending.”

In Predictably Irrational, Dan Ariely makes the following statement: “…what consumers are willing to pay can easily be manipulated, and this means that consumers don’t in fact have a good handle on their own preferences and the prices they are willing to pay for different goods and experiences.”

What can this trickery look like? Here are a few examples of manipulative anchoring I’ve observed.

Tip Prompts. I’m a believer in tipping well when I eat out, especially for outstanding service. These days, a tipping prompt that “helpfully” provides the dollar amounts for various tip percentages is often printed on the bill. Last year, after ordering food from a stand, the payment kiosk was spun to me to complete my transaction. To my surprise, the prompts started at 25% and went up to 35%. No table service was involved and I hadn’t even received my food. Needless to say, I opted for a custom tip and left a more suitable amount. In contrast, at my family’s favorite sushi spot, we receive superior service from a very attentive waitstaff. The suggested tips on their printed bills are 15%, 18%, and 20%. I always go well beyond the highest suggestion, because they earn it and their tip prompts don’t telegraph entitlement.

Charitable Gifts. I’ve noticed that when I make gifts to some charitable organizations, the next time they solicit me they use a higher dollar value as the starting point on their pre-printed return forms. If I give $50 to a college, in the next mailing the lowest box I can check is $75. If I haven’t made a gift in a while, they lower the amount to lure me back into the habit of contributing.

Manufacturer’s Suggested Retail Prices. Manufacturers can “suggest” any amount they want as the full retail price, thus establishing an anchor in the minds of many people. My understanding is that most clothing is purchased on sale. Clothing with a preposterous yet arbitrary starting price can be sold at 50% or more off while still providing a tidy profit to the seller.

CD Rates. My bank’s current CD rates range from 0.70% for 3 months to 1.00% for 72 months. Not too enticing, right? Still, they do have a single ‘special’: a 9-month CD offering 4.00%. I’m guessing most customers who open new CDs go for the special, even though that’s not a particularly great rate. My savings account at that bank pays a robust 0.02%, so maybe people who see that number as their anchor wouldn’t feel bad about opening a CD paying less than one percent.

When I was a kid, a decent sized candy bar cost a dime. Until the past few years, I could often purchase many of my favorites for around a buck. Today, I was picking up milk at our local convenience store and noticed that candy bars were going for $2.49 and up. Sorry, no can do. My anchor is holding fast on this one.