Latest / Behavioral Economics with Fexingo: Decision Making, Bias, and How People Really Spend / Why Your Brain Anchors on Irrelevant Numbers
Transcript
- Lucas: Here's a question. If I asked you to write down the last three digits of your phone number, and then I asked you to guess when Genghis Khan died, would the phone number affect your guess? Luna: That feels absurd. Those things have nothing to do with each other. Lucas: And yet, in a famous study, it did exactly that. People whose phone numbers ended in higher digits gave later dates for Genghis Khan's death. The median guess from people with high-number endings was something like the year 1300. People with low-number endings guessed around the 1100s. The actual year is 1227. Luna: Wait — so just having a larger number in your head pulled the estimate up? That's the anchoring effect, right? Lucas: Exactly. The anchoring effect is our tendency to rely too heavily on the first piece of information we encounter — the 'anchor' — when making decisions. And here's the creepy part: even when the anchor is obviously irrelevant, it still works. Luna: I think the classic example is the real estate agent who shows you a wildly overpriced house first, so the second one seems reasonable. Lucas: Right. That's the deliberate use of an anchor. But what's more insidious is how often anchors sneak into our thinking without us noticing. Take salary negotiations. There's a well-known study by Dan Ariely and his colleagues — they asked participants to write down the last two digits of their Social Security number, then asked how much they'd pay for a bottle of wine, a box of chocolates, a few other items. People with high Social Security ending digits bid sixty to one hundred and twenty percent more than those with low digits. Luna: That's a huge swing. And your Social Security number has nothing to do with the value of wine. Lucas: Nothing at all. But the number sat in their head and became a reference point. In the real world, a job offer with a specific salary number becomes an anchor. If you're offered sixty-five thousand, you'll negotiate around sixty-five thousand. If you'd never seen a number, you might have asked for eighty. Luna: So the first number out of the gate is incredibly powerful. Which is why, in negotiations, you want to be the one to set the anchor. Lucas: Absolutely. Let me give you a specific example from the commodities world. In the early 2000s, the Renco Group — a mining and metals company — was negotiating to buy a copper mine in Peru. The seller had a number in mind, but the Renco CEO, Ira Rennert, opened with an offer that was deliberately low. Really low. Something like two and a half billion dollars for a mine that was worth maybe four billion. Luna: That's a bold move. Did it work? Lucas: It didn't get them the mine at two and a half billion — the seller laughed them out of the room initially. But it reset the entire conversation. The final price ended up being around three point two billion, which was still far below the seller's initial asking price. The low anchor pulled the entire negotiation down. Luna: So even when the anchor is rejected, it still shifts the range. Lucas: Exactly. And it works in the opposite direction too. If you're selling your house and your realtor gives you an aggressive high price, that can become the anchor for potential buyers. But it can also backfire if the anchor is too extreme and buyers just walk away. Luna: There's a fine line between a strategic anchor and a ridiculous one. Lucas: Right. And anchors don't just affect financial decisions. They affect how we judge quality. A study at MIT offered students a series of items — a wireless keyboard, a bottle of wine, a box of Belgian chocolates. First, they had to write down the last two digits of their Social Security number. Then they were asked if they'd pay that dollar amount for each item. Finally, they were asked the maximum they'd actually pay. People with high Social Security numbers bid dramatically more. Luna: It's like the brain grabs the first number it sees and uses it as a scaffold, even when it's completely arbitrary. Lucas: That's the perfect way to put it. The anchor becomes a scaffold that we adjust from — but we don't adjust enough. Psychologists Amos Tversky and Daniel Kahneman, who first identified this, called it 'insufficient adjustment.' We correct away from the anchor, but not nearly enough. Luna: So how do we defend ourselves? If I'm going into a salary negotiation, I know the first number matters. But what if the other side throws out a number first? Lucas: The best defense is to prepare your own anchor before the conversation. Do your research. Know the market range. Then, when they give you a number, you don't just accept it — you counter with a number that's anchored to your research, not to theirs. And if you can, be the one to go first. But here's the thing: even when you know about the effect, it's still hard to resist. A 2012 study by researchers at the University of California, San Diego, found that even experienced real estate agents — people who negotiate every day — were influenced by the listing price of a house, even when they knew it was arbitrary. Luna: So being aware of it isn't a silver bullet. Lucas: No. But awareness helps you catch yourself. You can ask: 'What number would I have chosen if I'd never heard this first number?' That's not easy to do, but it's better than nothing. Luna: Let's talk about a more everyday example. Price tags at a store — like when you see a sign that says 'limit 10 per customer.' That subtly suggests that buying ten is normal, right? Lucas: Yep. That's an anchor on quantity. You went in planning to buy one, but the sign says ten, so you buy three. Or the classic 'was fifty dollars, now thirty-five.' The fifty becomes the anchor, and thirty-five feels like a steal, even if the item was never really sold for fifty. Luna: I've seen that with subscription pricing too. A company shows you the most expensive plan first, so the middle plan looks reasonable. Lucas: That's the decoy effect you and I talked about in episode two. There's a lot of overlap between these biases. But anchoring is maybe the most pervasive because it works with any number — even numbers that aren't prices. Luna: Give me a non-price example. Lucas: Sure. Charitable giving. A study by the University of Oregon found that when people were asked to donate to a cause, and the suggested donation was five dollars, they gave an average of about four dollars. When the suggested donation was fifty dollars, they gave an average of about fifteen. The anchor pulled them up, even though they could give any amount. Luna: So the asking amount literally shapes the donation. Lucas: Exactly. And that's why nonprofits often suggest specific donation amounts. It's not just convenience — it's an anchor. Luna: I wonder about the ethics of that. If you're a nonprofit, you want to raise money for a good cause. Using an anchor is effective, but is it manipulative? Lucas: It's a gray area. Every price tag is, in a sense, an anchor. The question is whether the anchor is misleading or just informative. If the suggested donation is based on what it actually costs to provide a service, that's one thing. If it's arbitrarily high to exploit the bias, that's another. Luna: So the listener can take away that they should be skeptical of the first number they hear in any decision — and maybe also be strategic about setting anchors themselves. Lucas: Exactly. And one more thing: anchors can be words, not just numbers. If a real estate agent says 'this is a charming fixer-upper,' the word 'charming' sets a positive anchor. If they say 'this needs some work,' that's a different frame. Luna: Language as anchor — yes. This is all about how the brain shortcuts. And speaking of shortcuts, I want to mention something. This show is completely listener-supported. No ads. And a small group of listeners already chips in to keep it going. Lucas: Yeah, that's right. If you've gotten value from these episodes — maybe you've saved money or negotiated better because of something we talked about — we have a buy me a coffee page. It's buy me a coffee dot com slash fexingo. That's literally it. No tiers, no perks, just supporting the work. Luna: We don't mention it often, but it really does matter. Every contribution helps us keep making these deep dives without commercial breaks. Lucas: And speaking of deep dives — I want to leave listeners with one more thought. The anchoring effect is powerful, but it's not invincible. If you can force yourself to think of an opposite anchor before you decide, you can counter it. For example, if you're buying a used car and the dealer says eight thousand, ask yourself: 'What would a mechanic say this car is worth?' That's a different anchor. Luna: So bring your own anchor to the conversation. Lucas: Right. And if you're the one setting the anchor, be bold but credible. A random number won't stick if it's completely detached from reality. But a well-researched, justifiable number? That can shape the entire outcome. Luna: Alright, next time we'll look at another bias that messes with our perception of value. Until then, keep questioning that first number.