We like to think we are rational decision—makers. However, if you have read any of our blog entries or, indeed, any of the popular books about how we decide (e.g., How We Decide, Blink, Predictably Irrational), then you already know we can be pretty irrational. We are pretty quirky when it comes to how we process information; these quirks certainly cost us money. You may even find yourself acting irrationally if you take our implicit buying motivations test.
One quirk is our anchoring bias-—that is, when we are faced with making a financial decision, we tend to stick with the first number we see. For instance, when you go to buy something, how you evaluate prices is influenced by which price you see first. If the first price you see is a high price, you will expect (and be more comfortable with) higher priced items.
Marketers know this and they ensure that you see the high prices first. Moreover, many product lines are constructed so that a high—end item anchors potential customers to a higher price. For example, we are much more willing to pay $50.00 for a bottle of wine at a restaurant when there is a $300.00 bottle on the menu. Funny how that $300.00 bottle of wine makes the restaurant a lot of money even if no one ever buys it.
But it gets better.
Anchors do not have to be related to impact your decisions. For instance, if I were to tell half of you that it was 100 degrees in Palm Springs yesterday and tell the other half that there was a 15% chance of rain in San Francisco tomorrow, the Palm Springs group would guess that Justin Bieber was substantially older than the San Francisco group. In fact, any number presented at random can influence your judgment. If you are skeptical, or if you just want to have some fun, tell people it was 100 degrees in Palm Springs yesterday and then ask them how old Justin Bieber is (he’s really 18).
What’s more, being a conscientious and thoughtful person actually makes matters worse. A conscientious type tends to selectively look for (and recall) information that is consistent with what they already know — even if the number they were anchored on was completely random.
So what can you do? Your best bet for avoiding the anchoring bias is to know what you can and should pay for something before you go shopping. Then, when you see or hear numbers at odds with that, you can simply turn away.
At BeyondThePurchase.Org, we are researching the connection between people’s spending habits, happiness, and values. To find out more about how your personality and values influence how you relate to money and spending, we encourage you to first Login or Register with Beyond The Purchase and then take our Sucker Rumination Scale and the Tightwad/Spendthrift Scale. We think you may learn a lot about how you and why you spend your money the way you do.