Latest / Behavioral Economics with Fexingo: Decision Making, Bias, and How People Really Spend / Why Your Brain Treats a Price Tag as a Memory Anchor
Transcript
- Lucas: A few years ago I was buying a used car, and the dealer showed me the sticker price first. Thirty-two thousand dollars. I knew it was inflated, but every counteroffer I made felt like a concession from that number. Luna: Right, because that first number becomes the anchor. Even when you know it's arbitrary, your brain treats it as a reference point. Lucas: Exactly. And that effect is so powerful that completely random numbers can influence how much you're willing to pay. Today we're talking about anchoring — the bias that makes the first price you see stick in your mind and shape every subsequent judgment. Luna: Before we get into the classic experiment, I want to say something quickly. We keep this show ad-free intentionally — because we think the topic deserves that. If walking through the economy with us has made something click for you, and you want to support that choice, it's buy me a coffee dot com slash fexingo. Lucas: Yeah, listener support is what lets us keep the episodes clean. No ads, no sponsor reads, just the research. Appreciate anyone who chips in. Luna: Okay, so the anchoring experiment you mentioned — is this the one with the Social Security numbers? Lucas: That's the one. Dan Ariely, back in 2003. He and his colleagues ran an auction for luxury goods — a bottle of wine, a cordless keyboard, a box of Belgian chocolates. But before the bidding started, they asked each student to write down the last two digits of their Social Security number. Luna: Then asked them if they'd pay that amount in dollars for each item. So if your digits were, say, 72, they'd ask: would you pay $72 for this bottle of wine? Lucas: Exactly. And then the real auction began. The students whose digits were in the top half — like 80 to 99 — they ended up bidding 60 to 100 percent more than those in the bottom half. The Social Security number had nothing to do with the value of the wine, but it set an anchor that shifted their entire willingness to pay. Luna: It's almost embarrassing to admit, but I can feel that happening in my own buying decisions. I see a 'was' price crossed out, and suddenly the 'now' price feels like a deal, even if it's still expensive. Lucas: That's the classic retail anchor. 'Was $200, now $150.' That $200 is probably fictional — or at least not what most people paid — but it makes $150 feel like a bargain. The anchor doesn't have to be truthful to work. Luna: There's a 2023 replication study that tested this again under time pressure. They found the anchoring effect actually gets stronger when people are rushed or distracted. Lucas: That makes sense. When you're not carefully deliberating, your brain grabs the first number available and uses it as a shortcut. And that's exactly what retailers count on. Think about how luxury brands price things. They'll show you a $5,000 handbag first, then a $1,500 one. The $1,500 one now looks reasonable, even though it's still a lot for a bag. Luna: So the anchor isn't just about the first number you see — it's about the contrast. The high price makes the next one look affordable. Lucas: And it works in negotiations too. If you're selling your car and you ask for $15,000, the buyer's counteroffer is going to be closer to $15,000 than if you'd asked for $12,000. The initial number sets the range. That's why experts always advise asking for more than you expect to get. Luna: But there's a flip side, right? If you're the buyer, you want to set a low anchor. Some real estate agents say that if you offer 20 percent below asking, even if that's rejected, the seller's counteroffer will be lower than it would have been otherwise. Lucas: Absolutely. And the anchoring bias doesn't just affect prices. It also affects your own expectations. If your first job offer out of college was $40,000, that number becomes your anchor for what you're worth. Even if the market rate for your skills is now $70,000, you might hesitate to ask for more because you're anchored to that $40,000. Luna: That's actually one of the most pernicious effects. It can hold your earnings down for years. And it's not rational — the first number you encountered has no real connection to your current value. Lucas: The key is awareness. Once you know about anchoring, you can try to identify what your anchor is and whether it's relevant. Before you negotiate a salary, research the market. Before you buy something, look at multiple prices, not just the first one. Try to extend the anchor range. Luna: I think the most striking example from Ariely's work isn't the Social Security experiment itself — it's when he asked a group: 'Would you pay $2 for this bottle of wine?' and another group: 'Would you pay $10?' The second group's subsequent bids were much higher, just because the initial question was different. Lucas: That's the 'anchor and adjust' heuristic. You start at the anchor and adjust insufficiently. So if the anchor is $10, you might adjust down to $8, but if the anchor is $2, you might adjust up to $4. The anchor doesn't even have to be a price — it can be a number that primes a scale. Luna: I've seen this in fundraising too. When nonprofits ask for a specific donation amount — like '$50 can feed a family for a week' — that $50 becomes an anchor. People give more than if they'd just been asked to give whatever they want. Lucas: And it works the other way. If a charity asks 'Would you consider giving $5?' that becomes the anchor, and most people stay close to $5. That's why professional fundraisers almost always suggest a range that includes a high number. Luna: So is there any way to really defend against anchoring? Or are we stuck with it? Lucas: You can't eliminate it, but you can reduce its power. One strategy is to generate your own anchor before you encounter the seller's. Look up market prices. Decide what you think is fair. Set a mental reference point that's based on data, not on whatever number someone shows you first. Luna: Another is just to slow down. The 2023 study showed that people with more time to think were less influenced by the anchor. So when you're shopping, especially for big-ticket items, don't decide on the spot. Give yourself a day. Lucas: There's also a technique called 'considering the opposite.' If someone says a price is $500, force yourself to think of reasons it might be worth only $200. That breaks the anchor's hold. Luna: But here's the thing: anchors can also be useful. If you're the seller, you can ethically set a reasonable anchor. When a company lists a subscription at $99 per year, that's an anchor. If they then offer a monthly plan at $9.99, the yearly plan looks like a better deal. Lucas: And that's not necessarily manipulative — as long as the anchor is grounded in reality. The problem is when retailers use fake 'was' prices. In many countries, there are regulations against that. But the bias itself is always there. Luna: I think the lesson for listeners is: the next time you see a price, ask yourself, 'What is my anchor here? Is it the first number I saw? Is it something I heard from a friend? Is it based on anything real?' Lucas: And if you can't find a good answer, you might want to step back. Because that anchor is probably working on you without you knowing it. And that's exactly what we're here to catch. Luna: Yeah. I think awareness is the first step. You can't turn off the bias, but you can recognize when it's happening. Lucas: Right. And that recognition is what gives you back some control. So next time you're about to buy something — or negotiate anything — ask yourself: am I anchored to something that doesn't deserve to be? If the answer is yes, you've already won half the battle.