Anchoring (Behavioural Economics)

What is anchoring and how does it affect choice?

Value is often set by anchors or imprints in our minds which we then use as mental reference points when making decisions. An anchor is any aspect of the environment that has no direct relevance to a decision but that nonetheless affects people's judgments. Once an idea or a value is firmly anchored in someone's mind it can lead to automatic decisions and behaviours.

Examples of anchors in markets

Some anchors establish in our mind a low price, others help to establish a higher basic price that we should be be prepared to pay on a regular basis

Examples of anchoring:

• “Big Price Drop” campaigns by supermarkets
• Refereeing decisions might be anchored by the size of home crowd
• Price anchors are used in menus at restaurants and in coffee shops

A famous example of anchoring is the credit-card / tip system operated in New York taxis

Under this system, credit card systems automatically suggested a 30, 25, or 20 percent tip. This caused passengers to think of 20 percent as the low tip whereas the previous average was only around 8-10 per cent. Since the installation of the credit card systems, average tips have risen to 22 percent (Grynbaum 2009).