Anchoring is among the most prevalent and impactful cognitive biases that we encounter in our daily lives, particularly when making decisions under uncertainty (Tversky & Kahneman, 1974). By placing too much weight on an initial piece of information — the reference point to which we attach (or “anchor”) or thoughts — the way in which we assess probabilities becomes distorted. As for its prevalence, anchoring is most common when we we deal with new concepts or objects, and most people struggle to overcome its effect, even when given incentives to do so (Simmons et al., 2010) or when they are made conscious of the bias (Wilson et al., 1996).
Anchoring and price
Given how anchoring afflicts us when dealing with new objects, and in situations involving uncertainty, it plays an important role in how we understand and assess prices, particularly of goods with which we are unfamiliar. Beyond pricing, anchoring can actually influence our perceptions of whether a product is good or not — and, in some cases, will dictate whether we consider it fair to pay or to be paid for a certain product or service (Ariely et al., 2006). This latter example shows just how powerful a simple anchor can be in influencing our perception of a good, and certainly undermines the notion that decision makers are perfectly rational agents.
With respect to our purchases, research suggests that, in forming our opinion of a certain item, we draw from a reference category of similar goods, which serves as our anchor. That is, when evaluating a pair of sneakers, I recall pairs I have purchased (or seen) in the past, and from that decide whether the price is “fair.” Though this behavior is often quite rational, it demonstrates the way that our previous experiences determine our subjective concept of how goods should be priced — and can be harmful when that anchor does not reflect the underlying value of a good. This concept of initial purchases serving as anchors is known as “coherent arbitrariness” (Ariely et al., 2003).
When anchoring influences our price assessment, it does so by changing the value we ascribe to different objects (Orr and Guthrie, 2005). In that sense, it is a very important tool for price-setting firms, as they determine the range of prices they will place on their products, and how those prices will be perceived by their customers. When a new and original product enters the market, consumers have difficulty valuing the new item without taking some arbitrary past price as a reference point. Thus, firms are able to influence their customers and dictate a reference price for their products. Of course, this is usually done by setting a high anchor price, such that subsequent reductions of the price (discounts, etc.) feel like a bargain and increase consumer demand (Dooley, 2008).
It is important to note that anchoring is also present in people with a high degree of knowledge and expertise in their respective fields. Such is the case in financial markets, where — despite decades of economists espousing the rationality of markets — asset prices do not seem to be based on underlying value (Summers, 1986) — and, in any case, comparison prices are essential to estimating value of, for instance, the Dow Jones Industrial Index (Shiller, 1998).
As more evidence accumulates as to how — and how often — anchoring affects our construction of value, mainstream economists will need to grapple with how to incorporate this characteristic of human judgment and decision making into models of economic behavior. Otherwise, our understanding of markets may turn out to be as arbitrary as how we view that pair of sneakers.
Marco Carrasco holds an M.Sc. in Economics and Psychology from the University of Paris 1: Panthéon - Sorbonne, Summa Cum Laude. He has previously worked at the Organization of American States in Washington, DC, and the Ministry of Development and Social Inclusion of Peru. He has researched at the Shanghai Academy of Social Sciences in China and the National University of San Marcos in Peru. He is a Co-Founder of the Peruvian NGO Behavioral Economics & Data Science Team (BEST) and has been a lecturer and guest speaker in various international seminars and events related to his areas of specialization: behavioral economics, and Asia and Latin America economic development. He is a current MPA-ID candidate at Harvard Kennedy School, where he is also conducting research and has assumed the Professional Development Chair of Harvard Behavioral Insights Student Group.
Recycling Matters A ‘Hole’ Lot: A Behavioral Design Perspective
Have you ever had your name spelled wrong on a disposable cup in a coffee shop?
If you have — and you probably have — chances are you did not recycle that cup.
That’s what a team of psychologists realized when they ran a study using cups with names spelled intentionally wrong, disguised as a juice tasting. People were significantly more likely to recycle their cup when their names were spelled correctly: 48% did, as opposed to 26% of those who had no name at all and a paltry 24% of those who had a misspell. Jennifer Argo, from the University of Alberta had this to say:
We are averse to trashing something that is tied to our identity, … as it would be conceptually similar to trashing a part of the self, which makes people more likely to recycle
When it comes to recycling, studies show that we can be easily swayed, and small details can produce big changes in behavior.
In another study, Argo and co-author Remi Trudel of Boston University discovered that when an object loses its original shape, its chances of being recycled collapse.
A crushed can, for example, is considered damaged — as such, it’s more likely to end up in the trash can than in the recycling bin:
When items become damaged, they differ from the ‘prototype’ or ideal version of that product, and as a result, they are perceived as being less useful. As consumers, we tend to equate things that are useless with garbage
Small bits of paper also usually end up in the trash can: People are less likely to recycle them even when the total quantity of small pieces is double that of a single regular sheet.
But just ask people what the bits of paper could be useful for, and 80% of the time, they will recycle it, showing how quickly we can shift our perception.
Things that are useful are recycled; they still serve a purpose. In fact, Coke ran a campaign shortly after our first paper on the topic, showing a crushed can and emphasizing it was still recyclable. Educating consumers through promotional techniques as well as highlighting identity would increase recycling,
The power of social scripts
A big push toward recycling can come from social norms, or unwritten rules on how to behave.
In 1990, psychologist Robert Cialdini of Arizona State University and his colleagues set up an experiment in a car park in Texas. As people walked back to their cars, they had an accomplice walk in front of them and drop a large flier on the floor. Half the time, this happened in a spotlessly clean parking lot. The other half, the lot was already full of litter.
Once they go to their car, the unsuspecting subjects found a similar flier obstructing the view on their windshield. What did they do with it?
Out of those who saw the confederate litter in the littered environment, 54% threw their flier on the floor: When exposed to a prevalent behavior, we follow suit.
Conversely, only 6% of those who saw the accomplice litter in the clean environment did so themselves: The gesture stood out, making it easy to disapprove of.
Cialdini used these findings to craft a series of TV ads to increase recycling in Arizona. In the ads, people who already recycled spoke approvingly of it while disparaging a single individual in these scene who did not recycle. A 25% increase in recycling was recorded in communities exposed to the ads.
Generally speaking, we don’t like to be outcasts; we want to fit in. In 2008, Cialdini and his colleagues Vladas Griskevicius and Noah Goldstein brought their attention to hotel towels, rearranging the wording of the signs that ask hotel guests to reuse their towels.
By simply replacing a standard ecological message with social norms — saying most guests in the hotel reused their towels — they witnessed a 26% increase in reuse. When they specifically referenced the guests who had previously stayed in the very same room, the increase shot up to 33%: the closer the influence, the greater its effect.
These devices, commonly called nudges, are also used by governments to entice desirable action across many areas, from tax returns to public health. Cialdini told CNN:
I am confident that influence techniques can be used to affect recycling action, too … My own research has demonstrated the power of one influence technique, the presentation of social norms regarding recycling, to significantly change recycling intentions and behavior.
Why recycling matters
Even simpler things like the shape of a lid can affect recycling behaviors, which is why bins tend to have differently shaped holes for different items such as bottles, cans or paper.
In a 2008 study titled “It matters a hole lot,” two sets of three bins where placed throughout an academic building. One set had no lids, while the other had a flap lid for trash, a lid with a 6-inch hole for recyclables and a lid with a narrow slit for paper.
The results were astonishing: Not only did the shaped lids increase correct recycling by 34%, but the amount of contaminants, such as food, in the recycling stream collapsed by 95%.
The key might be in the concept of “affordance,” which is a property of an object that tells us how to use it. A hanging string, for example, affords pulling; a handle on a door can afford — sometimes ambiguously — pushing or pulling.
The shaped lids provide affordance in a much stronger form than just a label and require people to pay attention to what they’re doing. The open lids won’t stop anyone who’s distracted from just tossing their trash into a random bin.
Well-designed waste bins, remark the study authors Sean Duffy and Michelle Verges, can thus be crucial for recycling: “Something that is nothing — a hole — can dramatically increase environmentally responsible behaviors.
The act of depositing an item into a recycling bin doesn’t make it disappear — nor guarantee that it won’t end up in a landfill — yet it’s quite enough to influence our decisions. Sometimes for the worse.
In a study titled “Recycling gone bad,” participants were split into two groups, given sheets of paper and asked to rate a new brand of scissors. One group only had a trash bin in the room, the other both a trash bin and a recycling bin. This group used far more paper to “test” the scissors.
A similar finding came from a follow-up study involving paper towels in a restroom. A bin marked with a recycling symbol created a significant uptick in consumption.
If the option to recycle is present, it seems, we use more resources: “We think this happens because people think about recycling in terms of its environmental benefits, with less awareness that there are also environmental costs,” said Jesse R. Catlin of Sacramento State University, one of the authors of the study. “This view may allow people to rationalize to themselves that consuming more is OK, as long as they recycle.”
If money is thrown into the mix, behavior changes again, according to a study from the University of British Columbia.
Two groups of students was again tasked with cutting up paper. They could then discard it into a trash bin within the room or use a recycling bin outside it. The group that was given an hourly wage as compensation for the test, as opposed to a fixed wage, recycled less: “Putting a price tag on time leaves individuals to focus on their own needs and goals, as opposed to the needs and goals of others, including the environment,” said Ashley Whillans, lead author of a paper on the study.
When time is money, we care less about the planet.
“People’s behavior can be sensitive to a variety of different factors,” said Catlin. “Whether it’s simply the availability of a nearby recycling bin or the signage applied to the bins themselves, the research seems clear that consumption levels and recycling decisions are not set in stone and therefore subject to change based on the particular situation.”
Ever since Dr. Stanley Milgram conducted his notorious experiment in the early 1960s, in which he asked participants to obediently administer a high-voltage “shock” to a victim, researchers have uncovered a wealth of fascinating insights into the human mind. But much of this study has been confined to laboratories and academia. Our aim as a behavioral science non-profit is to buck that trend by applying the lessons from behavioral science to the social sector.
What is behavioral science, and why is it so important for policymakers to understand?
Behavioral sciences are really pulling together all the research in social psychology, neuroscience and behavioral economics. This field is so important because people often behave in ways that are strange and peculiar. You want to go to the gym five times a week, you want to stay on this diet and you want to save more for retirement. Why isn’t that happening? We all tell ourselves what we want to do, then it doesn’t quite happen. Why not? We as human beings struggle to follow through on certain decisions, particularly things that are very important to us. But programs and policies in the social sector are often created in ways that don’t account for this fundamental aspect, how we behave as humans.
What’s an example of how this looks in practice?
One thing that has been looked at is how to help students complete college. There’s been a lot of great work in this area, but behavioral science dictates a different approach, which is the holistic student experience. How do we take the pulse of a student as they go through the process, day-to-day and semester-to-semester? How do we understand their various decisions, actions, habits? Knowing that there are constant hurdles a student needs to jump over — “Did I apply? Did I matriculate? Did I get my aid? Did I study? Did I pass?” — even a small one can trip them up. The solution isn’t any one piece; it’s creating a system that supports them throughout all of their college years.
It can be very simple, like reminders to complete the FAFSA. With something that small, the rate of those applying to university has been shown to almost double. Behavioral science can also be applied to tougher, more complex problems, like working with a college to figure out how to keep students from dropping out in the first year. A big part of the problem for students was feeling like they didn’t belong on campus. To target this, a video was embedded into orientation showing how lots of other students went through similar challenges, the way they overcame them and how thrilled they are now to be there. Through this approach, the retention rate rose from 83 to 91 percent, which is pretty amazing, just by understanding what these students experienced.
Addressing ethical dilemmas in applying behavioral science research to policy
No matter how you design anything, consciously or unconsciously, you create an outcome. The way anything is built, just in its structure, is nudging people one way or another. Our aim is to try to de-bias that and help people make the decision they want to be making. In the social sector, the main focus is on how we help people move from intention to action. In other words, the goal is not to tell people, “Now, do this,” but rather, helping them follow through.
We don’t realize everything else that’s going on in the lives of others; we don’t see the full picture of anyone’s environment. It’s easy to say, “I can’t believe you didn’t make it to the gym five times,” but then you don’t either. I can make these assumptions like, “Oh, she doesn’t have discipline,” but then come up with an excuse for my own lack of discipline. Understanding human behavior makes us more generous about others and ourselves. I’ve become much more forgiving of myself, knowing that lots of these things are funny quirks about human behavior.
City leaders face a daunting task when trying to convince residents to take a particular action — say, sign up for a doctor’s appointment or move online for services they’re used to receiving in person. But recently, a growing number of these leaders — including those in Denver, New Orleans, and San José, Calif. — have started taking cues from psychology to better understand why people make certain choices and then how to influence them toward behavior that increases city efficiency and helps leaders better meet residents’ needs.
In 2010, when former British Prime Minister David Cameron set up the world’s first government unit dedicated to behavioral science — or “nudges,” as they are colloquially known — his aim was fairly straightforward: save money. The unit he created, the Behavioural Insights Team (BIT), was given a clear mandate to save British taxpayers 10 times the unit’s operating cost in just its first year. It seemed a daunting challenge, but BIT ended up saving the treasury 20 times its operating expenses, and is estimated to have saved the national government ₤300 million (more than $386 million) in its first two years.
But BIT did more than save taxpayers’ money, it also increased tax income. For example: By better directing online taxpayers to the appropriate forms, it increased response rate by four percentage points. And by including a photo of an automobile in a letter about delinquent vehicle taxes, it increased relicensing rates by nine percentage points.
The trend toward governments drawing on psychology to better understand the motivations behind their constituents’ behavior spread slowly in the early 2000s.
The notion that human decision-making was less rational and more prone to influence by seemingly irrelevant factors flew in the face of the more common belief that free markets, alone, should guide decision-making. But now the so-called “nudge” is a widely accepted practice around the world.
A number of U.S. mayors also are increasingly turning to this practice. Their efforts got a major boost in 2015, when Bloomberg Philanthropies launched What Works Cities. The program is designed to help mayors and other leaders in 100 mid-sized American cities gather data, share it publicly, and use it to make better decisions.
As New Orleans Mayor Mitch Landrieu noted, “As a leader, I have to be able to define and understand a problem with objective information before I can start to solve it. And I have to know if the solution I’ve developed is actually working. What Works Cities’ data framework can help cities address and evaluate their programs with discipline.”
What Works Cities is partnering with BIT specifically help local governments communicate better with residents. Leaders in Denver, San José, and New Orleans have used this insight to get pay city taxes online (Denver), stop dumping waste in public spaces (San José), and make a doctor’s appointment (New Orleans).
One of the many things Hurricane Katrina upended in 2005 was New Orleans’ city health care system. Charity Hospital, which served the city’s uninsured prior to Katrina, was destroyed by the hurricane. Residents were, instead, directed to use community health centers. But many didn’t get the message — or didn’t make the transition. Ten years after Katrina, the city learned that nearly half of 56,000 residents eligible for free health care in the community clinics were not going on a regular basis.
The city’s Office of Performance and Accountability (OPA), founded by Landrieu, looked to change that with a nudge. Here’s how Oliver Wise, head of the OPA, framed the problem: “You know going to the doctor is good for you, but because we as human beings discount future benefit, we are far less inclined to seek that preventative care.”
New Orleans experimented with a text messaging service to see how small variations in its messages increased the number of residents who sought care. Eligible residents — 21,000 of them — were randomly assigned to one of three groups, each of which received a different text message. The first message simply stated that the recipient should, “Txt YES to be contacted to set up a FREE doctor’s appt.” The second message read, “You have been selected for a FREE doctor’s appt. Txt YES to set it up.” The third message used what’s known as a “pro-social” strategy by reminding recipients that their choices can positively affect others. It noted that the recipient should, “Take care of yourself so you can care for those you love” before offering the free appointment.
Five days after the text messages were sent, OPA analyzed the data — and found some surprising results. The second text, which emphasized how the recipient had been selected, was the most successful prompt, increasing the number of people scheduling appointments by 40 percent compared to the simple message. The third text, which emphasized the pro-social component, actually led to fewer recipients signing up for an appointment.
By testing different motivations for behavior — simply noting the offer of a free appointment, being selected, or being reminded of the obligations to loved ones — the city of New Orleans found that the most and least effective ways to spur the use of a government program differed from what was expected.
The team in San José was faced with an expensive citywide problem: Mattresses, couches, washing machines, and other large items were being dumped illegally near creeks, in vacant lots, and left curbside. And the problem was only getting worse. In fact, the increase in dumping not only created property value-sapping blight, it also directly cost the city thousands of dollars in cleanup expenses. That’s when the city’s Environmental Sciences Division (ESD) piloted a program that offered free, large-item pickup and disposal of up to three items.
To advertise the new Large Item Collection program, the ESD partnered with their colleagues on the Data Analytics team and at BIT. Together, they designed two different postcards advertising the free large item collection.
The first postcard, titled “Do It The Right Way,” noted the “The City of San José spends $87 each time someone improperly disposes a large item.” The second postcard, titled “You’ve Been Selected,” simply stated, “You’ve been selected to receive a FREE large item removal.” Both versions had text in English, Spanish, and Vietnamese, which are the most common languagesspoken in the city.
The city conducted a three-month study, where the team tracked the number of residents who used the service. The first postcard was sent to 3,280 households, and 3,281 households received the second postcard. A control group of 135,686 households received no direct-mail advertising the program. The first postcard resulted in a 75 percent increase in large item collections compared to the control group. The second postcard doubled that, resulting in a 150 percent increase in households using the service.
By testing different ways to appeal to residents, the city of San José not only saved money and reduced blight, but also found a more effective message to encourage residents to take advantage of a needed government service.
In Denver, the city created an online system specifically for businesses to electronically file their taxes. The city sent letters to businesses encouraging them to “Go Green!” But the effectiveness of the letters plateaued after the first 18 months, and online registration was stagnant. Working with BIT, city leaders devised a new framework to appeal to local entrepreneurs.
Psychological studies have shown that feelings of pain associated with losing are much more potent than the feelings of pleasure associated with winning. This is known as “loss aversion” in behavioral economics, and is associated with analyses of how people make choices. Drawing upon this insight, Denver experimented with how it framed reminders to businesses about the online system.
BIT tested two alternatives to the “Go Green!” message. One emphasized the time lost when not filing taxes online, and the other relied on social cues, noting that the business receiving the letter was in the minority of businesses not filing online. Both alternative letters out-performed the original.
As these examples show, the spread of behavioral insights into government isn’t only increasingly the norm, it’s proven to be an effective way of communicating with and better serving residents.