Latest / Behavioral Economics with Fexingo: Decision Making, Bias, and How People Really Spend / The Anchoring Effect How a First Number Hijacks Your Brain
Transcript
- Lucas: If I asked you right now — what percentage of United Nations member countries are in Africa? — you'd probably just guess. Maybe twenty percent. Maybe forty. You wouldn't know. Luna: I'd say... thirty-five? No idea, honestly. Maybe more than I think. Lucas: Right. Now imagine that before you answered, I spun a wheel of fortune in front of you — and it landed on sixty-five. Would that change your guess? Luna: It shouldn't. A random spin has nothing to do with African nations. Lucas: And yet it does. That's the anchoring effect — the tendency for an arbitrary number, even an obviously irrelevant one, to pull your subsequent estimate toward it. It's one of the most robust findings in behavioral economics, and it shapes how we buy houses, negotiate salaries, and decide whether a sweater is overpriced. Luna: So that wheel of fortune study — that's Tversky and Kahneman, right? Classic. Lucas: Exactly. 1996. Participants watched the wheel land on either ten or sixty-five — it was rigged — then answered the Africa question. People who saw ten guessed about twenty-five percent on average. People who saw sixty-five guessed about forty-five percent. Twenty-point gap from a completely meaningless spin. Luna: And they knew it was random. The wheel had numbers from zero to a hundred, and it wasn't even subtle. Lucas: That's the scary part. Anchoring works even when the anchor is blatantly absurd. In another version, they asked participants whether Gandhi was more or less than a hundred and forty years old when he died. Then they asked for the actual age. People anchored on that ridiculous number and still gave higher estimates than a group who got a low anchor. Luna: So the brain latches onto any number that comes first, then adjusts insufficiently. Even if we know it's silly. Lucas: Right. And the adjustment is always too small. We think we're being rational — 'okay, he wasn't that old, so maybe he was a hundred ten' — but we never move far enough from the anchor. Luna: This feels huge for pricing. Every time I see a $150 sweater next to a $50 scarf, that sweater is the anchor. The scarf suddenly seems reasonable. Lucas: That's the most common real-world application. Retailers love anchoring. You've seen the 'was $200, now $75' — the original price is the anchor. Even if nobody ever paid $200, your brain treats $75 as a bargain relative to that number. Luna: And it works even when the anchor is clearly made up. I remember a study where they showed people a can of soup with a fake 'suggested retail price' of $2.50, then sold it for $1.50. People thought it was a deal. Without the anchor, they'd have balked at $1.50. Lucas: Exactly. And anchoring isn't limited to prices. Real estate agents use it all the time. A listing price is an anchor. If a house is listed at $600,000, every offer hovers around that — even if the house is worth $500,000. The first number sets the range. Luna: So buyers who see a high listing price end up overpaying, because they adjust from that number instead of from the true value. Lucas: Right. And sellers can use it too — a very high initial asking price can pull offers up, even if it seems unrealistic. But there's a risk: an anchor that's too extreme can backfire because people dismiss it. The sweet spot is plausible but high. Luna: Let's talk salaries. I've read that the first number mentioned in a negotiation — whether it's the employer or the candidate — becomes an anchor. Lucas: It's one of the best-documented effects in negotiation research. A 2012 study by Dan Orr and Chris Guthrie looked at salary negotiations for MBA graduates. They found that when employers gave a low initial offer, final salaries ended up twelve to eighteen percent lower than when the candidate anchored high first. The first number essentially sets the ceiling or floor. Luna: So if you're the candidate, you want to speak first, and aim high but reasonable. Because once that number is out there, everything centers around it. Lucas: Exactly. And the effect is symmetrical — if you let the employer anchor low, you'll spend the whole conversation trying to climb up from there, and you'll probably settle for less than if you'd anchored high first. Luna: I've also seen anchoring in charitable donations. When a charity suggests a donation amount — say, $50 — people give closer to that than if they see no suggestion. Lucas: Yeah, that's a classic. The 'suggested donation' is an anchor. Nonprofits know this. They'll put three tiers on a donation page — $25, $50, $100 — and the middle one is often the most chosen. But if they put $50 at the top, people give more. Luna: So how do we defend against this? If anchors are everywhere, how do we avoid being pulled? Lucas: The first step is awareness. Just knowing about anchoring reduces its effect — but not entirely. Kahneman himself says you can't completely de-bias yourself. Luna: So what does work? Lucas: One strategy is to generate your own counter-anchor before you hear the other side. If you're going into a salary negotiation, research the market rate and decide your number first. That internal anchor can compete with the external one. Luna: So you're not just reacting to their number — you have a reference point of your own. Lucas: Right. Another tactic is to consciously consider the opposite. If someone says 'this car costs $35,000,' ask yourself: what would a completely fair price be, independent of that number? Force your brain to adjust more than it wants to. Luna: There's also a technique called 'considering the extremes.' If you're anchored on $35,000, think about what a ridiculously low price would be — $20,000 — and what a ridiculously high one would be — $50,000. That range helps you calibrate. Lucas: Yes, that's actually supported by research. A 2014 study found that asking people to think about both extremes before making a judgment reduced anchoring effects significantly. It forces you to move away from the single anchor point. Luna: And in a negotiation, you can also just delay your response. Take a beat. The anchor's power is strongest in the first few seconds. Lucas: Exactly. If you can say, 'let me think about that,' you give your brain a chance to engage System 2 — the slow, deliberate thinking — instead of automatically latching onto the anchor. Luna: I also wonder about the role of expertise. Do experts — like real estate agents or seasoned negotiators — fall for anchors too? Lucas: They do. In a famous study, real estate agents were shown a house with a listing price and asked to appraise it. Even though they were experts, their appraisals were influenced by the listing price. They thought they were objective, but the anchor pulled them. Luna: So no one is immune. That's humbling. Lucas: It is. But the good news is that with deliberate effort, you can reduce the bias. It just takes practice. Luna: If today was actually useful to you — and it sounds like it was for me — the way these episodes stay ad-free is listener support. You can head to buy me a coffee dot com slash fexingo. It's a simple way to keep these deep dives coming without any sponsors. Lucas: Yeah, and we really appreciate it. Every contribution helps us keep the show independent and focused on the research, not on selling stuff. So if you got something out of this, that's the place. Luna: Alright, back to the science. One thing I want to dig into is whether anchoring always works the same way across cultures. Lucas: Great question. There's some evidence that the effect is universal, but the magnitude varies. A 2010 meta-analysis of over a hundred studies found anchoring in every culture tested, but it was stronger in individualistic cultures — like the US — than in collectivist ones, like East Asian countries. The theory is that individualists rely more on internal judgments and are less likely to question initial numbers. Luna: Interesting. So in a culture where people are more likely to deliberate together, the anchor might be weaker. Lucas: Exactly. Group discussion can dilute the anchor because people bring different perspectives. But even then, if the group's first suggestion is an anchor, it can still shape the conversation. Luna: Let's talk about online shopping. Every time I see a countdown timer or a 'only 3 left' message, that's an anchor too, right? Scarcity as an anchor. Lucas: Partially. That's more about scarcity bias, but anchors can amplify it. The 'was $100, now $50' is pure anchoring. The 'limited stock' message adds urgency, but the price anchor does the heavy lifting. Luna: So when I see a $200 jacket marked down to $80, I think 'great deal.' But if I saw that same $80 jacket without the anchor, I'd think it's just an $80 jacket. Lucas: Exactly. And that's why retailers love original prices. Even if the product was never sold at that price, the anchor does its work. Luna: Okay, but here's a twist: can anchors be used for good? Like in public health? Lucas: Absolutely. For example, when you're trying to get people to save more for retirement, you can anchor them to a higher contribution rate. A 2013 study showed that when a default contribution rate was set at 6 percent instead of 3 percent, people saved more — even though they could opt down. The default acted as an anchor. Luna: That's a great example. Anchoring isn't inherently bad — it's just a feature of how our brain works. We can use it to help people make better decisions. Lucas: Precisely. The key is awareness. If you know anchors are coming, you can either defend against them or harness them for good. And that's really the core of behavioral economics: understanding the wiring so we can design better choices. Luna: I want to close with a practical takeaway. Next time you're about to make a purchase or negotiate, pause and ask: what is the anchor here? Is it the listed price, the initial offer, the suggested donation? Then consciously consider a range, not just that one number. Lucas: Solid advice. And if you want to test yourself, try this: next time you see a 'sale' price, cover the original before you look. See if the price still feels like a deal. That little exercise can reveal how much the anchor was pulling you. Luna: I'm going to try that. I bet I'll be surprised. Lucas: I think we all would be. That's the thing about anchors — they work best when we don't notice them. Once you see them, you start to see them everywhere.