Consumer psychology- the "anchoring effect"

You walk into a clothing store and see what is probably the greatest leather jacket you've ever seen.

You try it on, look in the mirror and decide you must have it. But you lift the sleeve to check the price – $1,000.

Well, that’s that, you think. You start to head back to the hanger when a salesperson stops you. “You like it?” “I love it, but a thousand dollars is just too much.”

“No, that jacket is on sale right now for $400.”

It’s expensive, and you don’t need it really, but $600 off the price seems like a great deal for a coat which will increase your cool factor by a thousand per cent. And you happily put it on the card, unaware you’ve been tricked by the oldest retail con in the business.

One of David McRaney's  first jobs was selling leather coats, and he depended on this "anchoring effect" to earn commission. Even though the company marked up the prices to unrealistic extremes, over and over, when people heard the sale price, they smiled and wrestled with their better judgment, as the price in their mind was "anchored" on the higher $1000 mark, so they smelled a bargain.

So, where do the prices you "expect" to pay originate? Psychology and Behavioural Researchers have spend decades researching this to our benefit

In 1974, Amos Tversky and Daniel Kahneman conducted a study asking people to estimate how many African countries were part of the United Nations, but first they spun a wheel of fortune. The wheel was painted with numbers from 0 to 100, but rigged to always land on 10 or 65. When the arrow stopped spinning, they asked the person in the experiment to say if they believed the percentage of countries was higher or lower than the number on the wheel.

They then asked people to estimate what they thought the actual percentage of nations was. They found people who landed on 10 in the first half of the experiment guessed around 25 percent of Africa was part of the U.N. Those who landed on 65 said around 45 percent.

Their perceptions had been locked in place by the anchoring effect.

The trick here is no one really knew what the answer was. They had to guess, yet it didn’t feel like a guess. As far as they knew, the wheel was a random number generator, but it produced something concrete to work from.

When they adjusted their estimates, they couldn’t avoid the previous anchor of the number from the wheel.

Anchors can make big numbers seem small, throw estimates out of whack and lead you into decisions which, in the long view, seem silly.

In many situations, people make estimates by starting from an initial value that is adjusted to yield the final answer. The initial value, or starting point, may be suggested by the formulation of the problem, or it may be the result of partial computation. In either case, adjustments are typically insufficient…that is, different starting points yield different estimates, which are biased toward the initial values.

- “Judgment Under Uncertainty” by Kahneman, Slovic and Tversky

When you need to choose between options, or estimate a value, you need footing to stand on. Like when you order from a menu- you have a feeling about the overall cost of food, but for this restaurant you tend to look at the menu and the first numbers you see anchor your perceptions.

Drazen Prelec and Dan Ariely conducted an experiment at MIT in 2006 where they had students bid on items in a bizarre auction.

The researchers would hold up a bottle of wine, or a textbook, or a cordless trackball and then describe in detail how awesome it was.

Then, each student had to write down the last two digits of their social security number as if it was the price of the item. If the last two digits were 11, then the bottle of wine was priced at $11. If the two numbers were 88, the cordless trackball was $88.

After they wrote down the pretend price, they bid. Sure enough, the anchoring effect scrambled their ability to judge the value of the items. People with high social security numbers paid up to 346 percent more than those with low numbers.

People with numbers from 80 to 99 paid on average $26 for the trackball, while those with 00 to 19 paid around $9.

Social security numbers were the anchor in this experiment only because we requested them. We could have just as well asked for the current temperature or the manufacturer’s suggested retail price. Any question, in fact, would have created the anchor. Does that seem rational? Of course not.

- Dan Ariely from his book, “Predictably Irrational”

and this research has been validated time and time again. Showing that while we think we are rational purchasers, that we aren't really.

Like most psychological phenomenon, anchoring can be used to manipulate people to do good. The best example is the door-in-the-face technique.

In a 1975 study by Catalan, Lewis, Vincent and Wheeler, researchers asked a group of students to volunteer as camp counselors two hours per week for two years.

They all said no.

The researchers followed up by asking if they would volunteer to supervise a single two-hour trip.

Fifty percent said yes.

When they asked for the 2-hour trip first without asking for the two-year commitment, only 17 percent agreed.

Remember this study if you are ever in a negotiation - make your initial request far too high.

You have to start somewhere, and your initial decision or calculation greatly influences all the choices which follow.

So review your menu and bar pricing to ensure you set an apropriate price perception in the minds of consumers. If your entry sign reads- two-for-the-price-of-one you're already branded a discount place so don't ask for high pricing inside.

Use this facet of consumer psychology to your and your businesses benefit.

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