Have you ever walked into a store, saw a jacket marked down from $150 to $75, and thought it was a great deal, even though you didn’t need it? Or maybe you were shopping online, and you saw a high-priced item next to a lower-priced option, which made the cheaper one seem like a bargain? This is an example of anchoring bias, our tendency to rely too heavily on the first piece of information we encounter (the “anchor”) when making decisions, even when it doesn’t make sense.
In this article, we’ll break down:
- What anchoring bias is and why it affects our decisions
- How it plays a role in everyday life, especially in spending and shopping
- Examples of anchoring bias in real-life situations
- How to avoid being influenced by anchoring bias in your financial decisions
Let’s dive in.
What is Anchoring Bias? (Explaining It Like You’re 5)
Imagine you’re at a lemonade stand, and the first glass you see costs $5. Then, the next one is only $2. The second glass seems like a great deal, right? But if you’d only seen the $2 glass first, you might not have thought it was so special.
Anchoring bias is the reason why the first price you see can influence your decision. The first price becomes the “anchor,” and everything else is judged based on it, even if the comparison doesn’t make sense. It’s like using a “starting point” to compare all the other prices, and that starting point affects your judgment.
Why Anchoring Bias Happens
Anchoring bias happens because our brains are trying to make quick decisions in a complex world. The first piece of information we get helps our brains “anchor” future decisions around it. But the problem is, we often accept that first piece of information without questioning it, which can lead to poor choices.
Here’s why anchoring bias occurs:
- Cognitive Shortcuts: Our brains are constantly trying to save time and effort. So, we latch onto the first number we see or hear (the anchor) and use it as a reference point for everything else.
- Framing Effects: How information is presented can influence our perception. A high-priced item next to a lower-priced one can make the lower price seem like a better deal, even if it’s still overpriced.
- Irrational Thinking: Even if the initial information (the anchor) doesn’t make sense, we often rely on it because it’s the first thing we encounter.
How Anchoring Bias Affects Your Financial Decisions
Anchoring bias can have a significant impact on how we make financial decisions. From shopping to investing, this bias can lead us to overpay for items, make poor investment choices, and even misjudge the value of services or products.
Here’s how anchoring bias shows up in everyday financial decisions:
1. Shopping and Bargain Hunting
Scenario: You see a jacket at a store marked down from $150 to $75. You think, “What a great deal! I have to buy it!” But when you look at the jacket, you realize it’s not your style, and you don’t even need a new jacket.
- Why Anchoring Bias Happens: The $150 price tag is the anchor, and it makes the $75 price seem like a bargain, even if the jacket wasn’t something you were actually interested in. The initial price point skews your perception of value.
2. Car Sales and Negotiation
Scenario: You walk into a car dealership, and the first car you see is listed for $40,000. Later, the dealer shows you another car for $30,000, and you think it’s a much better deal, even though $30,000 is still a lot of money for a car.
- Why Anchoring Bias Happens: The first car, at $40,000, serves as an anchor, making the second car seem cheaper in comparison,even though $30,000 is still a significant amount of money.
3. Investments and Stock Prices
Scenario: You’re thinking of investing in a stock that’s been trading at $100 per share for months. The stock suddenly drops to $70, and you hesitate to buy, thinking it’s a bad deal. But when the stock rebounds to $80, you feel like it’s still a bargain and jump in.
- Why Anchoring Bias Happens: The $100 price tag anchors your judgment, making you think anything below that is a “bargain,” even if the stock is still overpriced relative to its performance and market trends.
Real-World Examples of Anchoring Bias in Action
Here are some real-world examples where anchoring bias plays a role in people’s decisions:
1. Price Discounts and “Original” Prices
When you see an item marked down from $200 to $100, your brain automatically thinks it’s a great deal. But what if the item was never worth $200 in the first place? Retailers often inflate the “original” price to make the discount seem more attractive, even though the true value of the product may not be that high.
- Why It’s a Problem: You’re influenced by the original price as an anchor, leading you to make a purchase you might not have considered if you saw the real price to begin with.
2. Restaurant Menu Pricing
In many high-end restaurants, the most expensive dish is often placed at the top of the menu. When you look at the other items, they seem relatively affordable in comparison, even if they’re still priced higher than you expected to pay.
- Why It’s a Problem: The high price of the first dish serves as the anchor, making the other dishes seem like better deals, even though you might not have planned to spend that much on dinner.
3. Real Estate Listings
Real estate agents often show you a house with a high asking price, which makes the next house, which is a little cheaper, seem like a steal. But just because the second house is cheaper doesn’t mean it’s a good deal.
- Why It’s a Problem: The first, more expensive house is the anchor, influencing your perception of the second house. You may be swayed into thinking it’s a good deal when it might not be the best value.
How to Avoid Anchoring Bias in Your Financial Decisions
The good news is, you can avoid being influenced by anchoring bias and make smarter financial decisions. Here are some strategies to help you combat this bias:
1. Focus on Your True Needs and Goals
When shopping or making a financial decision, stop and ask yourself: Do I really need this? Just because an item is marked as discounted doesn’t mean you need to buy it. Stick to your goals and avoid impulse buys driven by an anchor.
2. Do Your Own Research
Instead of relying on the first price you see, research the true market value of what you’re buying. For instance, if you’re looking for a car, check multiple listings before deciding what’s a good deal.
3. Set a Budget and Stick to It
Before you go shopping or make a major purchase, set a budget and decide what you’re willing to spend. This will help you resist the temptation to make decisions based on the anchor price.
4. Take a Step Back
If you feel yourself being swayed by an anchor, take a moment to step back and reassess. Ask yourself if the decision you’re making is truly the best option for you in the long run.
Conclusion: Breaking Free from Anchoring Bias
Anchoring bias can have a major impact on your financial decisions, leading you to make choices based on the first piece of information you encounter. By recognizing this bias and taking steps to focus on your true needs, research your options, and stick to a budget, you can make smarter, more informed decisions.
Key Takeaways:
- Anchoring bias makes us overvalue the first piece of information we encounter, skewing our judgment.
- It affects decisions in shopping, investing, and major purchases like cars and houses.
- To avoid being influenced by anchoring bias, stick to your goals, research options, and set a budget.
If you’re curious about how biases can shape your financial decisions, check out our article on Loss Aversion 101: Why Losing Hurts More Than Winning Feels Good. We explore how the fear of loss can drive financial behavior and what you can do to make more rational decisions.
The Broke College Student 
Leave a comment