Know Your Nuggets: Anchoring

Charlotte_Notaras
By Charlotte Notaras
Student at Princeton University

September 28, 2018

Editor's Note: Drama on the set of PeopleScience!

Until now, our Know Your Nugget series has been written by Bob Sullivan. But – HA HA! – our intern Charlotte drafted one and, dagnbait, it’s pretty good. Your days are numbered, Bob, ol chum! Say goodbye to…

Hold on. (Puts finger to ear.) I’m being told that Charlotte returned to complete her studies at Princeton and has a very bright future which, apparently, “Won’t include writing for the likes of that ‘chump editor’ at PeopleScience.” Hmmm. I see.

(Clears throat.) Bob. Baby! You are doing a great job! Looking good. Have you lost weight? Gained height? Gotten younger? You just keep… What’s that? A raise? I. I. I gotta go.

Anchoring!

Experiment Time!

To participate in a PeopleScience behavioral experiment, complete the following steps:

  1. Think of the last two digits of your phone number and write them down on a piece of paper.
  2. Do you think the percentage of African countries that are part of the UN is greater than or less than the number you’ve written down?
  3. What percentage of African countries do you think are part of the UN? 

Chances are that your answer to the third question is very close to the last two digits of your phone number. Why? We tend to anchor to the first piece of information we get, even if that information is completely irrelevant.  

The PeopleScience team recently performed a similar, informal experiment at the 2018 e4 conference. We asked the audience to write down the last two digits of their phone numbers then had them taste a red wine. They then wrote down how much they would pay for the wine for our first wine tasting, the group with phone numbers ending in numbers between 76 and 100 were willing to pay three times as much for the wine as those in the 0 to 25 group ($36 vs. $12).  

After explaining this effect to the audience and showing them the results, we tried it again. This time we changed it up by using a white wine asking for the last three  digits of their phone number. We found….exactly the same effect! The quartile with the higher digits in their phone number were willing to pay $38 versus $16 for the group with the lowest three digits.

 
Proof of science (and wine-induced smiles)

 

Alexa, Show Me Anchoring

Amos Tversky and Daniel Kahneman conducted an experiment in 1974 very similar to the one about the UN above. Participants were asked to spin a wheel that was labeled 0 to 100, but they were unaware that the wheel was rigged to land on either 10 or 65. Once the participants spun the wheel, they were asked whether the percentage of African countries that belong to the UN was higher or lower than the number on the wheel. Then, they were asked to estimate the actual percentage.  

If people were not anchoring, we would expect to see an approximately uniform distribution of numbers between 0 and 100. Tversky and Kahneman found that participants who landed on 10 estimated the percentage to be around 25%, but those who landed on 60 guessed it was around 45%. Clearly, these participants did not know the answer (neither did I, but the correct answer is 100%, so everyone was wrong). The important takeaway from this study is that the first number the participants saw biased how they answered the following questions, despite the number on the wheel, or the last two digits of your phone number being unrelated to the task.  

The first number the participants saw biased how they answered the following questions despite being unrelated.

The repercussions of the anchoring effect stretch far and wide, but an easy example to consider is retail pricing.  Many stores mark up products hoping to get you to pay more if you think you’re saving money off the “retail price” of an item. It’s not just stores that benefit from this practice; consumers love to think they’re getting a good deal, even if they end up paying full price. JCPenney found this out when they decided to eliminate coupons and big savings sales in favor of avoiding markups and offering “everyday low pricing.” Customers immediately complained, and sales dropped quickly, so the brand went back to convincing consumers they were saving money with huge discounts, when they were really just paying the normal price for goods. (Editor’s note: We discuss this very story in our book, “Dollars and Sense.” End commercial.) 

Great! Why Do Business Leaders Care? 

When determining prices for an item, the anchoring effect can certainly be an advantage. Apple is one company that excels at harnessing this effect. The release of the iPhone X had many people questioning who would pay $999 for a phone, but it was Apple’s top-selling model each week in the second quarter of 2018. Between the release of the X and the most recent release of the XS, XS Max, and XR, Apple has given its consumers enough time to adjust their expectations of the price of an iPhone. These new phones are anchored around the iPhone X price point. Since people are now used to the idea of paying $999 for an iPhone,  $749 for the iPhone XR seems like a bargain, despite being twice the price of the average smartphone.  

It’s not just prices people anchor to when assessing the value of an object or experience.

But, it’s not just prices people anchor to when assessing the value of an object or experience. How can customers pay $999 for the iPhone X when you can buy a phone with similar features for less than half the price? With the iPhone, Apple has created a unique experience that is difficult to compare to other phones. They’ve certainly created a cult of devoted fans; some customers even justify spending up to 250 hours waiting in line to be the first to buy the newest Apple products. So, the next time you release a product, look to Apple as a real-world example of how anchoring can not only boost profits but also create a loyal fanbase for your company.

Charlotte_Notaras
By Charlotte Notaras
Student at Princeton University

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