The psychology of ‘price anchoring’
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Tess Vigeland: One of my favorite things about this show is we get to talk about our brains. Why we do the smart and not-so-smart things we all do with our money? Because so much of it is about emotion and hard-wiring.
Today we’re going to explore something called “price anchoring.” It’s something that happens every single day in your decision-making process, including the decisions you make about how you’re going to dole out your precious dollars. Nick Epley teaches behavioral science at the University of Chicago Booth School of Business and joins me now. Welcome!
Nick Epley: Thank you for having me.
Vigeland: Why don’t you kind of describe for us in your own words this idea of anchoring and how we do it in our everyday lives.
Epley: It’s actually simple. Any time a number pops into your mind, it influences your judgement. So you think a football player has made more tackles in a year if their jersey number is 97 than if it’s 27.
Epley: Yeah. Or a car mechanic. If you come into the mechanic’s shop and you say, “Do you think this will cost more or less than $1,000?” They’ll estimate that it’ll cost less money than if you ask, “Do you think this will cost more or less than $5,000?”
Epley: So it shows up in so many places, it’s all over the map. If I ask you, “Is Mt. Everest taller or shorter than 50,000 feet?” What do you think Tess, how tall is Mt. Everest?
Vigeland: Oh geez, I should really know this. Less than?
Epley: Less than 50,000. How tall is Mt. Everest?
Vigeland: 30,000, 28,000?
Epley: It’s pretty close, so it’s 29,035 feet. If I’d ask you though, is Mt. Everest taller or shorter than 5,000 feet, chances are you would have given it a much lower estimate.
Vigeland: Well no, I lived in Oregon, so I know that Mt. Hood is 11,000 feet and I know Mt. Everest is taller than Mt. Hood.
Epley: That offset the 50,000-foot anchor just a little bit. You’re using a slightly different anchor.
Vigeland: In fact, I anchor everything to what I know about Mt. Hood.
Epley: Is that right? All things?
Vigeland: Yes, everything in life!
Epley: How much is in your bank account? It must be less than 11,000. Must be more, who knows?
Vigeland: Certainly less than that. I am an anchor woman!
Epley: That’s right! There you go.
Vigeland: All right. How do companies on Madison Avenue use this to sell us on products and things?
Epley: Well, I don’t know the exact details, ’cause I’m not in Madison Avenue. But I do know how it can affect consumers. There’s a really neat study (PDF) by Bryan Wansink’s a researcher at Cornell University. He went into a grocery store and put up different advertisements for Snickers bars. And in one condition, the advertisement said, “Buy some for you freezer.” And the other condition it said, “Buy 18 for your freezer!” And people bought considerably more when they were encouraged to buy 18 for their freezer than when they were encouraged to buy some.
Vigeland: So what is happening in our brains there?
Epley: Well, a couple things are happening. One is that the decisions that we make are made online. Right, so when you go into a grocery store, if you’ve got a list, you kinda know what you’re gonna buy. But then a lot of decisions you make on the fly: How many Snickers bars do you really need? Well, I don’t know. And the way we make things up on the fly are by attending carefully to numbers that are out there and sometimes those numbers can be arbitrary, like buying 18 Snickers bars for your freezer.
Vigeland: So, is this something that we can use as consumers to affect our own behavior?
Epley: Well, it’s a kind of phenomena you need to be cognizant of. You need to be paying careful attention to the anchors that are relevant, like the amount of money you have to spend is relevant for whether something is affordable or not. So the cost of a Toyota Camry last year is relevant for the cost of a Toyota Camry this year, if you’re trying to figure out what that is. The close of the stock market yesterday is very relevant for the close of the stock market today. So lots of anchors out there in the world are relevant. What we have to be on guard for are the irrelevant ones: What you pay on your credit card balance isn’t the function of what the credit card company tells you is the minimum amount you could pay. It’s a function of how much you can afford to pay on this. Or even in a salary negotiation, it’s been shown that the opening salary offer matters a lot for the eventual price that you get at the end of the negotiation. It’s been show to influence judges’ decisions of the sentence that should be awarded to somebody, so the prosecutor-suggested sentence influences the judge’s belief about the length of a sentence.
Vigeland: I just have a picture going through my head from that movie “A Beautiful Mind,” where all those numbers and facts and figures were floating in and out on the screen. And guess that’s what we’re all going through — perhaps not quite as smart as that — but on a daily basis we are surrounded by numbers and they are affecting us.
Epley: They are. And I think the bigger problem is that unlike in “A Beautiful Mind,” where there are lots and lots of numbers and broad ranges that you might consider for any given problem, the problem we have as human beings, normal human beings, is that we tend to consider one number. One anchor. And that’s the problem that we get into. Not considering too many, it’s just that we consider one, the one that’s easiest to bring to mind sometimes.
Vigeland: Nick Epley is a professor of behavioral science at the University of Chicago’s Booth School of Business. Thanks for coming in. It’s been fascinating.
Epley: Thank you very much for having me.