How Does Anchoring Impact Our Decisions?

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).