4.1.2.3 Biases in Decision Making - The Anchoring Effect (AQA)

The anchoring effect is a cognitive bias that describes how people can be influenced by the first piece of information they receive. For example, when asked to estimate the number of African countries in the United Nations, people will tend to be biased by the first number they hear. If they hear a low number first, their estimate will likely be lower than if they hear a high number first. This is because they "anchor" their estimate to the first number they hear, even though it may have no logical connection to the actual answer.

In the field of behavioural economics, biases play a significant role in influencing how individuals make decisions. One of these biases is the anchoring effect, a cognitive bias that can lead to systematic errors in judgment and decision-making.

This study note explores the concept of the anchoring effect, its implications, and provides real-world examples.

What is the Anchoring Effect?

The anchoring effect is a cognitive bias where individuals rely heavily on the first piece of information they encounter when making decisions.

This initial information, often referred to as the "anchor," serves as a reference point that subsequently influences their judgments or choices.

Even if the anchor is arbitrary or unrelated to the decision at hand, it can skew people's perceptions and lead to suboptimal decisions.

Key Characteristics of the Anchoring Effect:

1. The Influence of the Anchor: The anchor exerts a disproportionate influence on subsequent judgments or decisions. People tend to adjust their estimates or choices based on the anchor, but they often do not adjust enough.
2. Persistence: The anchoring effect tends to persist even when individuals are aware of its influence. People may recognise that the anchor is irrelevant, but they still struggle to overcome its impact.

Real-World Examples:

Let's explore some real-world examples to better understand the anchoring effect:

1. Negotiations:

• Example: In a salary negotiation, the employer may start with a low initial offer (the anchor). Even if the candidate knows their true value is higher, they may still end up accepting a lower salary because the anchor influenced their perception of a fair wage.

2. Retail Pricing:

• Example: A store prices a product at $199.99 instead of $200.00. The lower left digit, "1," serves as the anchor. Customers may perceive the product as significantly cheaper due to this minor difference in price.

3. Real Estate:

• Example: A seller lists their house for $1 million. Even if the market value is lower, potential buyers may be anchored to the initial asking price and find it challenging to make offers significantly below that figure.

4. Auctions:

• Example: In an auction, the starting bid (the anchor) for an artwork is set at $10,000. Bidders' offers may cluster around this anchor, with most bids falling within a relatively narrow range influenced by the starting point.

In conclusion, the anchoring effect is a cognitive bias that significantly influences decision-making. A-level students should be familiar with this bias, its characteristics, and its real-world implications to make more informed and rational decisions in various contexts.