Decision-making is a step-by-step process that may allow you to gather information and come to a conclusion. There can be certain areas where it may be easy to make a final choice. However, there can be multiple areas where it may get challenging to gather relevant information or even identify what’s right. In other situations, unexpected biases and expectations can influence the process of decision-making. Anchoring bias is a pervasive cognitive bias that primarily occurs when there is too much reliance on the first piece of information. It may occur during the initial stage when an anchor is being used as a reference or a starting point to understand the situation. The subsequent actions and d ecisions are made in relation to the first piece of information, which can impact the process of decision-making. Let us learn more about what anchoring bias is and how it can affect the decision-making process.
Origin of Anchoring Bias
The concept was formulated in 1974 by Kahneman and Tversky. They conducted a study with a group of high school students to identify the techniques they would use for the same topic. One of the groups was given to solve the problem of this equation (1x2x3x4x5x6x7x8), whereas the other was assigned to solve this (8x7x6x5x4x3x2x1).
The key to note here is that the numbers mentioned are the same, just that the sequence or order of writing them is different. The answer for both groups should have been the same, i.e., 40,320. However, none of them answered it correctly. The first group mentioned 512 as the median estimate, while the second group answered 2,250. The difference occurred because the participants focused on the product of the first few numbers. For instance, 1X2X3 = 6, whereas 8X7X6 = 336. This small experiment led them to prove that there is often too much reliance on the initial cue to make the final estimates and decisions. This can result in anchoring bias and may lead to errors in the judgment process.
Why does it happen?
Anchoring bias primarily occurs because of the primacy effect, which emphasizes that people tend to remember things they learn first. As suggested by Stewart in 2004, he believed that there is a huge tendency that people may forget what they learn at a later stage or may not remember it correctly.
It can also occur because of the following reasons:
- When you are in a sad mood or feeling down, you may rely on the anchors.
- The other reason could be the anchor-and-adjust hypothesis. It may occur when you are uncertain about a situation or do not have proper knowledge of it. In that case, you may choose to use the initial value or knowledge as the basis for all future judgments.
- The selective accessibility theory is another concern that may lead to anchoring bias. When you selectively choose or support any piece of information, you are more likely to remember it, which may affect the decision-making process.
Examples of Anchoring Bias
Anchoring bias is often used to display the difference between original prices and discounted prices. When a customer sees a considerable drop in the prices, they are tempted to make the decision to purchase. However, there is an important thing to keep in mind if there is anything suspicious. There can be chances that the product may be old or of poor quality. Instead of making such quick decisions, be mindful of how you want to proceed with it and make the right purchase.
Anchoring Bias Affects Your Willingness to Pay
The anchoring bias can affect your willingness to spend and make financial decisions . For instance, if you read online that the starting price of a tablet is $1000. If you visit the store and you see the tablet available for $980, you will be prompted to make the purchase. In other cases, you might try to visit different stores or browse different websites to find the price and availability. You made a quick decision because of the information that you received in the first phase and trusted it all. It may directly impact the negotiations you may make with the other person. You might become hesitant because you have already prepared in mind that the product is available for this price only.
It Influences More Than Money
Anchoring bias may not only impact financial decisions but also have the tendency to affect your perceptions or the way you look at those things. The anchoring bias may influence all the decisions you make. Your perspective might be limited, which may make it difficult for you to accept new innovations or experiment outside. Before coming to any conclusion, take your time to critically analyze the situation. Consider the pros and cons carefully before making the final call , and gather all the possible information before making any decision.
Skewed Expectations
Apart from poor decision- making, anchor bias can also affect the expectations we develop. Over time, you may have specific theories and values associated with a topic. If things do not align with your expectations, it might make you feel bad about the situation. One of the possible effects of a nchor bias is that you may stop accepting new information. The pre-existing information can restrict your thinking capabilities.
Avoid relying on a single source of information or being reluctant to accept new ideas. Widen the lens and look at things from different perspectives to avoid having an anchoring bias in the process.
