How Rational Are Your Consumer Choices?

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Synopsis

How easily you can be influenced by hidden anchor price point persuaders.

Here is a set of numbers. Ask someone to estimate, not to calculate, the answer within five seconds.
A:
8 x 7 x 6 x 5 x 4 x 3 x 2 x 1

Here is another set of numbers. Now find another person and ask that person to estimate the answer for version B within five seconds.

B:
1 x 2 x 3 x 4 x 5 x 6 x 7 x 8

You will probably discover that the second person gave you a smaller answer than the first, and both people gave figures well below the real answer (which is 40,320).
What happens is that the first number of the series biases the person’s thinking. This number anchors the person’s thought process and unduly influences the estimate they make for the calculation. The first series starts with a higher anchor "8" than for the second. When researchers carried out an experiment of these two questions, the average estimate for the first series was 3200 compared to only 300 for the second.
Both estimates are well below the correct answer because both series as a whole are made up of small numbers which biases the estimates to fall far below the true answer. In fact, you can bias a person’s reasoning by giving them an anchor that has nothing to do with the problem. Ask a person for the last three digits of the person's telephone number. Add 400 to this number and then ask, "Do you think Attila the Hun was defeated in Europe before or after X (X being the year you got by adding 400 to the telephone number)?" Don’t say whether the person got it right (the correct answer is A.D. 451), and then ask, "In what year would you guess Attila the Hun was defeated?" The answers you get will vary depending upon the initial number you got adding 400 to the person's telephone number.

The strength of the anchoring effect was further demonstrated by an experiment involving the estimation of the value of a house for sale. All subjects were given a tour of the house in question and identical information about it, except for the listing price, which were different, some high and some low. The prices varied 4% or 12% above or below the house's appraised value. The researchers found that the listing price significantly biased the estimates given by the subjects, even the most experienced real estate agents. The subjects anchored their estimated value of the house to their belief about the listed price. The estimates confirmed their belief about the accuracy of the listed price.

Most important human judgments are made under conditions of uncertainty. We use heuristics, or rules of thumb, to guide us in such instances as we try to determine what belief or action has the highest probability of being the correct one in a given situation. These rules of thumb are often instinctive and irrational guesses. Social psychologists such as Thomas Gilovich, Daniel Kahneman, and Amos Tversky have studied several important heuristics and discovered errors associated with their use. One of these heuristics is the anchoring heuristic. Our judgment regarding the frequency, probability, or value of items is often determined by comparing the item to an anchor point.

I know a clothier who is well aware of how you can influence a customer’s thinking by manipulating an “anchor point.” If you found a coat in his store you liked, when you examine the price tag you will find it has three different prices with the highest two crossed out. You may think you’re getting a bargain if you accept the highest price as an anchor. In reality, he makes up the highest numbers and the lowest price is much higher than it would be in other shops.

Behavioral economist Dan Ariely conducted numerous experiments that demonstrate the power of suggestion in establishing arbitrary values of goods and services as anchors. Combined with our tendency to try to be consistent, Ariely explains how we are easily manipulated into patterns of "arbitrary coherence." Once we have an anchor price in our mind, it will shape not only how we view present prices but future prices as well.

In one experiment, he had the subjects write down the last two digits of their social security number. He then asked them if they would pay that amount (say $79 or $12) for a bottle of wine. The subjects were not wine experts but the lower their social security digits, the lower the price they were willing to pay for the wine.
Not only did the arbitrary social security number affect what value they put on the first bottle of wine, it affected the value they put on every bottle of wind that was then offered. Traditional economics has defended a free market economy on the assumption that human beings are generally rational in their market behavior and choices. More and more, scientists like Ariely are establishing that our market behavior is more irrational than rational.

The implication of arbitrary coherence is that it calls into question one of the basic assumptions of a free market and free trade. If we can be manipulated to value things in arbitrary ways, the alleged benefits of a free market are called into question. If values aren't simply matters of supply and demand evaluated by rational creatures who know what they want and need and how much they are willing to pay for it or charge for it, then it is the manipulators who stand to benefit from free trade.
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Michael Michalko is the author of the highly acclaimed Thinkertoys: A Handbook of Creative Thinking Techniques; Cracking Creativity: The Secrets of Creative Genius; ThinkPak: A Brainstorming Card Deck and Creative Thinkering: Putting Your Imagination to Work. Learn more here.

 

Tags: creativity, education, psychology

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