The Weight Of The Anchor Effect
Assume you are at a store looking at an item, and the salesman comes over and tells you it is a great deal, do you believe him?
The answer may astonish you.
Basic economic theory informs us that prices are set by a persons willingness to pay. But, what is behind a persons willingness to pay? Are there factors that influence perception of value? How does someone know how much they should pay for something?
The power of anchoring
The fact is, there are invisible forces at work in establishing what people think is a “good price.” And the funny thing is that these perceptions on “good price” can be relatively arbitrary.
Jack and Jill have been dating for two years. Every week, at the same time, they sit down together in front of their 30″ television to watch The Walking Dead. They value this time together. As their anniversary approaches, both of them want to do something special for the other.
Jack decides to go out to the store and buy a top-of-the-line large flatscreen for Jill. He knows nothing about television prices; he only knows that he wants something that would bring The Walking Dead to life. This could only make Jill happy, right? He goes to the store to look at televisions and finds a 60″ that would fit perfectly in their living room. The price tag reads $2499; however, it is on sale for $999. Jack is psyched and buys the television because he feels he is getting a deal he can’t pass up.
Unbeknownst to Jack, Jill also goes out to buy a large flatscreen for Jack. She reasons that it will make their time together even better. More importantly, she knows that Jack has wanted a new television for awhile. She knows nothing about television prices. She goes to a different store and looks at the exact same 60″ model that Jack looked at. She sees the price tag of $2499. However, in her store, the television is not for sale. As she is getting ready to leave, a salesman approaches and tells her he will take 20% off if she leaves with the television today. She pays the the $1999 because she feels she got a great deal.
What gives? How can Jack and Jill both feel they got a great deal, despite the fact that they spent dramatically different amounts? How can they both feel great about their purchases? How would they feel if they shared the amounts they spent with each other?
The answer lies in what behavioral economists and cognitive psychologists call an anchor. Since Jack and Jill both entered the sales process without expectation on price, they needed a reference or starting point. Some sort of cue to help them evaluate the item or price in context.
Both Jack and Jill were given the original price of the television – $2499. That became the anchor. It became the reference point that guided all other decisions about the purchase.
It is why Jack and Jill both thought they were getting a great deal, despite the deals being dramatically different.
About the Authors
Dan Pilat
Dan is a Co-Founder and Managing Director at The Decision Lab. He is a bestselling author of Intention - a book he wrote with Wiley on the mindful application of behavioral science in organizations. Dan has a background in organizational decision making, with a BComm in Decision & Information Systems from McGill University. He has worked on enterprise-level behavioral architecture at TD Securities and BMO Capital Markets, where he advised management on the implementation of systems processing billions of dollars per week. Driven by an appetite for the latest in technology, Dan created a course on business intelligence and lectured at McGill University, and has applied behavioral science to topics such as augmented and virtual reality.
Dr. Sekoul Krastev
Sekoul is a Co-Founder and Managing Director at The Decision Lab. He is a bestselling author of Intention - a book he wrote with Wiley on the mindful application of behavioral science in organizations. A decision scientist with a PhD in Decision Neuroscience from McGill University, Sekoul's work has been featured in peer-reviewed journals and has been presented at conferences around the world. Sekoul previously advised management on innovation and engagement strategy at The Boston Consulting Group as well as on online media strategy at Google. He has a deep interest in the applications of behavioral science to new technology and has published on these topics in places such as the Huffington Post and Strategy & Business.
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