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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.
Sorry, but solicitations from charitable organizations don’t belong in this list. They aren’t trying to fleece or fool you. Research shows donors who share a passion for your mission will give more if asked. Since non-profit leaders are devoted to their missions, of COURSE they will ask you to consider a larger gift with each solicitation. Their intentions are honorable.
FYI, it’s Anchors Aweigh
So you didn’t appreciate my little play on words, eh?
Another example is offering much the same product at three different price points in the expectation that people will opt for the middle price. My first set of hearing aids were priced that way….
Anchoring is a new name for an old concept. I first read about things being fixed in customer minds many years ago in the book Positioning, by Ries and Trout. The focus in this book wasn’t decision making per se, but how hard it is to change something that had been “positioned” previously and how people dealt with new information. One of the best examples of this was the attempt by Xerox to market one of the earliest versions of a personal computer. Even though Xerox, at its Palo Alto Research Center, had invented things like the graphical user interface and pointing devices, Xerox, to most people, meant copier and could not mean computer….and their new PC flopped. If you have not read, it is a great, short read.
Kahneman and Tversky theorized the anchoring and adjustment effect in 1974. Rise and Trout published Positioning in 1980. The earliest research article on this topic was published in the Journal of Experimental Psychology in 1958: “Assimilation and effects of anchoring stimuli on judgments” by Sherif, Taub, and Hovland.
https://psycnet.apa.org/record/1959-05304-001
A better saying for your position is, “no WILL do”. I know you can afford to buy the candy bar Ken, you just are not willing to pay the price.
When I purchase ANYTHING I ask myself one simple question. Is it a good value?
Many years ago I remember being told that there was a proposed law to require manufacturers to actually sell a certain amount of an item at the suggested retail price in order to have a sale claiming a percentage off.
I have no idea if that was true or not, but it helped train me to do my due diligence when shopping.
And I’m with you on any single serve items such as candy bars and bottled drinks. Not gonna pay 2 or 3 bucks for my Pepsi Zero when I can get a 12 pack on sale for $4.
I used to get Macy’s ads all the time in the mail. For some reason, one day I decided to read all the disclaimers and fine print. From what I remember, my wife and I would laugh about all the sales because it appeared nothing ever really sold at retail.
The next time I received a mailer, I saw asterisks next to most of the prices. The fine print was very clear: “no items may have ever sold at the list price.”
Whether that was there because of a law, I don’t know. At a minimum, Macy’s was worried about being sued.
That’s a great example. I’m going to have to scour the fine print on mailers we get to see what else is out there.
Dan, I’m a Pepsi Zero-holic, and I too won’t buy it unless it’s on sale. Fortunately, it always is… cans one week, bottles the next.
My pet peeve is when packaged water goes on sale. My personal anchor point for H2O is quite low. Indeed, almost free from the tap!
That one hurts the most for me. Where I live, tap water is great so the idea of paying dollars for 1 bottle of it is painful.