Anchoring Bias

Anchoring Bias

Anchoring bias is a cognitive bias that refers to the tendency of people to rely too heavily on the first piece of information they receive (the "anchor") when making decisions or judgments. This initial information, whether it's accurate or not, can influence subsequent decisions and lead to an inadequate adjustment away from that anchor.

An illustration of historical prejudice is the debates surrounding the Treaty of Versailles, which put an end to World War I in 1919. Under the terms of the Treaty of Versailles, Germany and its allies were forced to pay expensive reparations and lose land. An essential part of the pact were the reparations Germany was required to pay to the Allies as compensation for the harm caused during the war.

The anchoring bias in this context may be seen in how the Allied forces, particularly Britain and France, made the initial requests for reparations. These first requests were quite high, reflecting the enormous destruction and suffering inflicted by the conflict. However, given Germany's economic and social turmoil in the aftermath of the war, the German delegation saw these requests as excessive and unachievable.

The initial anchor of large reparations impacted the future negotiations despite Germany's protestations and attempts to negotiate more reasonable conditions. Due in part to the anchoring bias, the Allies were hesitant to considerably lower their demands. As a result, Germany was required to pay significant final reparations, which made the subsequent economic problems the nation experienced worse. The growth of extremism in Germany and the eventual start of World War II are both attributed in part to this economic strain.

In this example, the negotiations and results of the Treaty of Versailles were significantly influenced by anchoring bias. Despite the possibility that a more balanced strategy would have resulted in more stable geopolitical conditions in post-war Europe, the initial anchor of substantial reparations affected later decisions.

Lets understand Anchoring bias with marketing example, how companies influence your decision making.

Imagine you are in the market for a new mobile phone, and you visit a local electronics store. You notice two mobiles on display:

1. Mobile 1: Originally priced at 20k but currently on sale for 15k.
2. Mobile 2: A newer model with more advanced features, but it is priced at its regular retail price of 25K.

In this scenario, Mobile 1 serves as an anchor. It's the first price you see, and it creates a reference point for your decision-making process. Here's how anchoring bias might influence your choice:

1. Perceived Value: Because Mobile a is presented first and at a lower price due to the sale, you might perceive it as a better deal or better value for money, even if you haven't objectively evaluated or understand its features or compared it to mobile 2.

2. Decision-Making: The 15k price tag for Mobile 1 becomes the reference point, and you may be more inclined to consider other mobile in comparison to this anchor. You might be less willing to consider mobile 2 because it is significantly more expensive than the anchor.

3. Negotiation: If you decide to negotiate the price with the salesperson, your starting point might be closer to 15k than to 25K because the anchor has influenced your perception of a reasonable price range.

In this example, anchoring bias can lead you to favor Mobile 1 simply because it was presented first at a lower price, even if mobile 2 offers better features and overall value. Marketers often use anchoring techniques to influence consumer behavior. They may display a high-priced item first and then offer discounts to make it seem like a better deal or present a more expensive option to make other products seem more affordable.

To avoid falling victim to anchoring bias in your purchasing decisions, it's essential to be aware of the influence of initial information and take the time to objectively evaluate options based on your needs and preferences rather than solely relying on the anchor.