Anchoring and Adjustment

1979 Energy Crisis

What is anchoring and fitting?

Anchoring and adjustment is a phenomenon in which an individual bases his initial ideas and responses on an information point and brings about the changes induced by this starting point. The anchor and fit heuristic describes cases where a person uses a specific target number or value as a starting point, known as anchor, and then adjusts this information until a acceptable value is reached over time. Often these adjustments are inadequate and stay too close to the original anchor, which is problematic when the anchor is very different from the real answer.

Key points to remember

  • Anchoring and adjustment are cognitive heuristics where a person starts from an initial idea and adjusts their beliefs according to this starting point.
  • Anchoring and adjustment have been shown to produce erroneous results when the initial anchoring deviates from the actual value.
  • Awareness of the anchor, monetary incentives, careful consideration of a range of ideas, expertise, experience, personality and possible mood can all change the effects of the anchor.
  • The anchor can be used advantageously in sales and price negotiations where the definition of an initial anchor can influence subsequent negotiations in your favor.

Understand anchoring and adjustment

Anchoring is a cognitive bias described by behavioral finance in which individuals focus on a target number or value, usually the first one they get, such as an expected price or economic forecast. Unlike the bias of conservatism, which has similar effects but which is based on how investors associate new information with old information, anchoring occurs when an individual makes new decisions based on the old number d anchor. Paying particular attention to new information to determine its impact on initial forecasts or opinions may help to mitigate the anchoring and adjustment effects, but the characteristics of the decision maker are as important as a conscious consideration.

The problem with anchoring and adjusting is that if the value of the initial anchor is not the true value, then all subsequent adjustments will be systematically biased towards the anchor and away from the true value. However, if the anchor is close to the actual value, there is essentially no problem.

One of the problems with adjustments is that they can be influenced by irrelevant information that the individual may think of and make unfounded connections to the actual target value. For example, suppose an individual receives a random number and then asks an unrelated question that seeks an answer in the form of an estimated value or requires that a mathematical equation be executed quickly. Even if the random number that was shown to them has nothing to do with the answer sought, it could be considered a visual clue and become an anchor for their answers. The anchor values ​​can be self-generated, be the output of a pricing model or a forecasting tool, or be suggested by an outside person.

Studies have shown that certain factors can influence anchoring, but it is difficult to avoid, even when people are aware of it and deliberately try to avoid it. In experimental studies, talking to people about anchoring, warning them that it can skew their judgment, and even offering them financial incentives to avoid anchoring can reduce, but not eliminate, the effect of anchoring. Higher levels of experience and skill in a specific area can help reduce the impact of anchoring in that area, and higher general cognitive ability can reduce the effects of anchoring in general. Personality and emotion can also play a role. A depressed mood increases anchoring, as do the personality traits of pleasure, conscience, introversion and openness.

Anchoring and adjusting in business and finance

In negotiations about sales, prices and wages, anchoring and adjusting can be a powerful tool. Studies have shown that setting an anchor at the start of a negotiation can have more effect on the end result than the intermediate negotiation process. Defining a deliberate starting point may affect the range of all subsequent counter offers.

For example, a used car salesperson (or any salesperson) may offer a very high price to enter into negotiations that is likely to be well above fair value. Because the high price is an anchor, the final price will tend to be higher than if the car seller had offered a fair or low price to start with. A similar technique can be applied in hiring negotiations when a hiring manager or a future candidate offers an initial salary. Each of the parties can then push the discussion to this starting point, in the hope of reaching a pleasant amount derived from the anchor.

In finance, the release of a pricing model or an economic forecasting tool can become the anchor of an analyst. One possible way to counter this is to look at multiple and diverse patterns or evidence. Social psychologist Phillip Tetlock has found that forecasters who make predictions based on many different ideas or perspectives (“foxes”) tend to make better forecasts than those who focus on one model or a few big ideas ( “hedgehogs”). Taking into account several different models and a range of different forecasts can make the work of an analyst less vulnerable to anchoring effects.

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