Anchoring effect
The anchoring effect is a psychological phenomenon in which an individual's judgments or decisions are influenced by a reference point or "anchor" which can be completely irrelevant.
The original description of the anchoring effect came from psychophysics. When judging stimuli along a continuum, it was noticed that the first and last stimuli were used to compare the other stimuli. This concept was notably formalized in behavioral economics by Amos Tversky and Daniel Kahneman. In their seminal 1974 work, they described anchoring as a heuristic used to make estimates under uncertainty.
Both numeric and non-numeric anchoring have been reported through research. In numeric anchoring, once the value of the anchor is set, subsequent arguments, estimates, etc. made by an individual may change from what they would have otherwise been without the anchor. For example, an individual may be more likely to purchase a car if it is placed alongside a more expensive model. Non-numeric anchoring has been observed in physical judgments involving length, weight, and volume.
Experimental findings
The anchoring and adjustment heuristic was first theorized by Amos Tversky and Daniel Kahneman. In one of their first studies, participants were separated into one of two conditions, and either asked to compute, within 5 seconds, the product of the numbers one through to eight, either as or reversed as. Because participants did not have enough time to calculate the full answer, they had to make an estimate after their first few multiplications. When these first multiplications gave a small answer – because the sequence started with small numbers – the median estimate was 512; when the sequence started with the larger numbers, the median estimate was 2,250. In another study by Tversky and Kahneman, participants were asked to estimate the percentage of African countries in the United Nations. Before estimating, the participants first observed a roulette wheel that was predetermined to stop on either 10 or 65. Participants whose wheel stopped on 10 guessed lower values than participants whose wheel stopped at 65. The pattern has held in other experiments for a wide variety of different subjects of estimation.As a second example, in a study by Dan Ariely, an audience is first asked to write the last two digits of their social security number and consider whether they would pay this number of dollars for items whose value they did not know, such as wine, chocolate and computer equipment. They were then asked to bid for these items, with the result that the audience members with higher two-digit numbers would submit bids that were between 60 percent and 120 percent higher than those with the lower social security numbers, which had become their anchor. When asked if they believed the number was informative of the value of the item, quite a few said yes. Trying to avoid this confusion, a small number of studies used procedures that were clearly random, such as Excel random generator button and die roll, and failed to replicate anchoring effects.
The anchoring effect has also been documented in real estate markets. In one study in the Journal of Real Estate Research, it was established that the 2-year and 9-year highs on the Case-Shiller House Price Index could be used as anchors in predicting current house prices. The findings were used to indicate that, in forecasting house prices, these 2-year and 9-years highs might be relevant.
In behavioral finance, anchoring has been observed in stock-purchase decisions. A study found that when using an app-based stock brokerage, an investor's first stock purchase price serves as an anchor for future stock purchases. The findings indicate that when investors start by making only a small stock purchase, they end up with less accumulated investments in the long run.
Characteristics
Difficulty of avoiding
Various studies have shown that anchoring is very difficult to avoid. For example, in one study students were given anchors that were wrong. They were asked whether Mahatma Gandhi died before or after age 9, or before or after age 140. Clearly neither of these anchors can be correct, but when the two groups were asked to suggest when they thought he had died, they guessed significantly differently.Other studies have tried to eliminate anchoring much more directly. In a study exploring the causes and properties of anchoring, participants were exposed to an anchor and asked to guess how many physicians were listed in the local phone book. In addition, they were explicitly informed that anchoring would "contaminate" their responses, and that they should do their best to correct for that. A control group received no anchor and no explanation. Regardless of how they were informed and whether they were informed correctly, all of the experimental groups reported higher estimates than the control group. Thus, despite being expressly aware of the anchoring effect, most participants were still unable to avoid it. A later study found that even when offered monetary incentives, most people are unable to effectively adjust from an anchor.
Although it has been found through many research and experiments that attempt to mitigate the decision heuristic of anchoring bias is either marginally significant or not successful at all, it can be found that the consider-the-opposite has been the most reliable in mitigating the anchoring bias. In short, the COS strategy is proposed to an individual by asking them to consider the possibilities the opposite of their perceptions and beliefs. Therefore, depriving the individual of their preexisting attitudes and limiting the decision bias.
Durability of anchoring
Anchoring effects are also shown to remain adequately present given the accessibility of knowledge pertaining to the target. This, in turn, suggests that despite a delay in judgement towards a target, the extent of anchoring effects have seen to remain unmitigated within a given time period. A series of three experiments were conducted to test the longevity of anchoring effects. It was observed that despite a delay of one week being introduced for half the sample population of each experiment, similar results of immediate judgement and delayed judgement of the target were achieved. The experiments concluded that external information experienced within the delayed judgement period shows little influence relative to self-generated anchors even with commonly encountered targets used in one of the experiments, showing that anchoring effects may precede priming in duration especially when the anchoring effects were formed during the task. Further research to conclude an effect that is effectively retained over a substantial period of time has proven inconsistent.Pervasiveness across contexts
One notable characteristic of the anchoring effect is its pervasiveness across diverse judgment scenarios. Furnham and Boo highlight that anchoring occurs not only in abstract estimation tasks but also in real-world contexts such as legal sentencing, consumer purchasing, salary negotiations, and forecasting. Anchoring persists even when the anchor is implausible or clearly irrelevant, demonstrating that anchoring can operate automatically, outside of conscious awareness or logical evaluation.Anchoring bias in groups
It is often presumed that groups come to a more unbiased decision relative to individuals. However, this assumption is supported with varied findings that could not come to a general consensus. Nevertheless, while some groups are able to perform better than an individual member, they are found to be just as biased or even more biased relative to their individual counterparts. A possible cause would be the discriminatory fashion in which information is communicated, processed and aggregated based on each individual's anchored knowledge and belief. This results in a diminished quality in the decision-making process and consequently, amplifies the pre-existing anchored biases.The cause of group anchoring remains unsure. Group anchors may have been established at the group level or may simply be the culmination of several individual's personal anchors. Prior studies have shown that when given an anchor before the experiment, individual members consolidated the respective anchors to attain a decision in the direction of the anchor placed. However, a distinction between individual and group-based anchor biases does exist, with groups tending to ignore or disregard external information due to the confidence in the joint decision-making process. The presence of pre-anchor preferences also impeded the extent to which external anchors affected the group decision, as groups tend to allocate more weight to self-generated anchors, according to the 'competing anchor hypothesis'.
Recently, it has been suggested that the group member who speaks first often has an unproportionally high impact on the final decision. A series of experiments were conducted to investigate anchoring bias in groups and possible solutions to avoid or mitigate anchoring. The first experiment established that groups are indeed influenced by anchors while the other two experiments highlighted methods to overcome group anchoring bias. Methods that were utilized include the use of process accountability and motivation through competition instead of cooperation to reduce the influence of anchors within groups.