Latest / Behavioral Economics with Fexingo: Decision Making, Bias, and How People Really Spend / How the First Number You See Sets the Price Youll Pay
Transcript
- Lucas: You know that moment when you're shopping for a used car, and the salesman throws out a number — maybe $15,000 — and suddenly every other car you look at is judged against that figure? Even if it's not a great deal, that first number sticks in your head. Luna: It's like the price becomes the reference point whether you want it to or not. I've definitely done that — thought something was a bargain just because it was lower than the first thing I saw. Lucas: Exactly. That's the anchoring effect in action. It was first documented by Daniel Kahneman and Amos Tversky in the early 1970s. They ran an experiment where they spun a wheel of fortune — it was rigged to land on either 10 or 65 — and then asked participants what percentage of African nations are in the United Nations. Luna: And people who saw 10 guessed around 25 percent on average, while those who saw 65 guessed around 45 percent. Even though the wheel was obviously random. Lucas: Right. The number didn't even need to be related to the question. It just had to be present. And that's the scary part — anchors work even when we know they're arbitrary. In follow-up studies, they told participants the numbers were generated randomly and it barely reduced the effect. Luna: So real estate agents who see a listing price of $500,000 for a house that's actually worth $450,000 might unconsciously adjust upward from that anchor rather than from scratch. Lucas: There's a famous study where real estate agents were given a tour of a property and then shown a random list price — either below market, at market, or above market. Even though they were experts and insisted the price didn't influence them, their appraisals were significantly biased toward the anchor they saw. Luna: That's humbling. So how do you protect yourself? I've heard that in negotiations, you should make the first offer if you have a strong anchor, because it sets the range. Lucas: Absolutely. In salary negotiations, the first number that gets thrown out — whether it's the employer's offer or the candidate's ask — tends to be a powerful predictor of the final outcome. One study found that candidates who made the first offer ended up with salaries about $5,000 higher on average than those who waited for the employer to speak first. Luna: But what if the employer's anchor is ridiculously low? Doesn't that backfire? Lucas: It can. There's a phenomenon called the 'winner's curse' in auctions — if you win an item, you might have overpaid because you were anchored to the starting bid. But generally, the person who sets the anchor first has an advantage, as long as the anchor is plausible. If you ask for $200,000 for an entry-level job, you'll be dismissed rather than anchored. Luna: It's funny — retailers have been using this forever. The 'manufacturer's suggested retail price' is often an anchor that makes the actual selling price look like a deal. Lucas: Right. That's why you see a shirt with a sticker price of $80 crossed out and marked down to $50. The $80 is the anchor; the $50 feels like a steal. But if the shirt had been priced at $50 from the start, you'd probably think it's just okay. Luna: And it doesn't even have to be a price. I read about a study where people were asked to write down the last two digits of their social security number, then bid on items like a bottle of wine or a cordless keyboard. Those with high digits bid 60 to 120 percent more than those with low digits. Lucas: That's the classic 'arbitrary anchor' study. Your social security number has nothing to do with the value of a keyboard, but it still influences your willingness to pay. It's really hard to escape. Luna: So what about defending against it? You mentioned making the first offer. What else? Lucas: One tactic is to consciously generate an opposing anchor before you hear one. For example, if you're going to negotiate a salary, research a few data points so you have your own range in mind. Another is to use the 'consider the opposite' technique — force yourself to think of reasons why the anchor might be wrong. If a real estate agent throws out a number, ask yourself: what would make this house worth 20 percent less? Luna: That takes mental effort, though. And in a fast negotiation, it's hard to stop and do that. Lucas: It does, but awareness alone can help. Even just knowing about the bias makes you more likely to question the first number you see. Some jurisdictions have even tried to regulate anchoring — for example, requiring that original prices in sales be genuine rather than inflated anchors. Luna: But that's tricky. How do you prove a price is 'inflated'? It's subjective. Lucas: Exactly. And that's why anchoring is so pervasive — it's a feature of how our brains work, not a bug that can be easily legislated away. But I think the most practical advice is: whenever you encounter a number in a decision context, pause and ask yourself, 'Is this number relevant? Or is it just here to influence me?' Luna: That's a good filter. And if the answer is 'it's just here to influence me,' you can try to replace it with your own anchor. Lucas: Right. Now, this kind of insight — understanding how your own mind can be nudged — is exactly why we do this show. It's practical stuff you can use in real life. And if you find these episodes useful, there's a simple way to keep them coming ad-free. Luna: Yeah, listener support is what keeps this whole thing going without commercials. It's a small way to say 'this matters to me.' Lucas: Exactly. If you've gotten value from today's dive into anchoring, or from any episode, you can support the show at buy me a coffee dot com slash fexingo. That's buy me a coffee dot com slash fexingo. And we truly appreciate it. Luna: So back to anchoring — one last wrinkle. Does the anchoring effect work in reverse? Like, if you see a very low price first, does that make higher prices seem unreasonable? Lucas: Yes, it works both ways. A low anchor can make subsequent prices feel expensive. That's why some retailers intentionally put a cheap item next to a premium one — the cheap one anchors you, and the premium one feels like an upgrade rather than an overreach. Luna: Interesting. So they're using a decoy anchor, almost like the decoy effect we talked about in episode 132. Lucas: Similar idea. And it shows just how context-dependent our perception of value is. There's no such thing as an 'absolute' price in our brains — it's always relative to something. Luna: Which is why caveat emptor — let the buyer beware — has never been more relevant. Lucas: Or maybe caveat venditor — let the seller beware — because if you set the wrong anchor, you could leave money on the table. For example, if you price your house too low out of fear, you might anchor buyers to a lower range and sell for less than you could have gotten with a higher initial listing. Luna: So whether you're buying or selling, the first number matters. That's a good thing to remember next time you see a price tag or walk into a negotiation. Lucas: It really is. And it's one of those biases that, once you see it, you start seeing it everywhere. That's the beauty — and the danger — of behavioral economics.