The anchoring bias effect, also known as the anchoring effect, is a cognitive bias that influences decision-making and judgment. It occurs when people rely too heavily on the first piece of information they encounter, known as the anchor, and subsequently adjust their evaluations and predictions based on this reference point. This heuristics causes a distortion in perception and decision-making, leading to potential biases in various contexts.
Heuristics are simple mental shortcuts that facilitate quick decision-making and problem-solving in uncertain situations. However, these shortcuts can also result in cognitive biases, with the anchoring bias being one such example.
The anchoring bias can be both numeric and non-numeric, is pervasive and can impact a wide range of situations, from everyday decisions to complex financial and business choices.
For instance, in one numeric anchoring example, consumers might be influenced by the product’s original price in a sale, causing them to perceive the discounted price as a better deal than it might actually be. In the investing world, the anchoring effect can lead to investors basing their decisions on historical prices or trends, preventing them from adjusting their valuations according to changing market conditions.
Underlying Mechanisms and Causes
One of the underlying mechanisms to explain this phenomenon is the heuristic approach. Heuristics are mental shortcuts that help individuals make quick decisions or solve problems by simplifying complex information.
In the case of the anchoring effect, individuals tend to rely on the initial piece of information, or anchor, as a reference point for subsequent judgments. This reliance on the anchor results in biased estimations and decisions.
Selective Accessibility
Another mechanism behind the anchoring effect is selective accessibility. This explanation is derived from a theory known as confirmatory hypothesis testing.
According to the perspective of selective accessibility, a person making a decision will consider the likelihood that the offered anchor is a good response. Assuming it isn’t, the judge accesses all pertinent information about the anchor itself before making another estimate. The anchoring effect occurs when the judge compares the new answer to the anchor by looking for similarities.
For example, if a person is given a high anchor for a product’s price, they might recall instances when they paid a similar price for similar products, leading them to believe the anchor is a reasonable value.
Anchoring and Adjusting
Tversky and Kahneman proposed a theory in their original study that was subsequently dubbed anchoring and adjustment heuristic. This hypothesis holds that after an anchor is established, people move away from it in order to arrive at their final guess. Nevertheless, their movement is insufficient, and their final guess ends up closer to the anchor than it would have otherwise.
Anchoring effects are amplified by factors that influence the capacity for judgmental correction, such as alcohol intoxication and performing a taxing cognitive load (rehearsing a long string of digits in working memory). Incentivizing accuracy appears to reduce anchoring effects when people know which direction they should adjust in.
Supporters of alternative theories have disputed this concept, arguing that it applies only in situations where the initial anchor is not within the permitted range of responses.
Influence on Decision Making
Anchoring bias plays a significant role in the process of decision-making, particularly in estimations and predictions. When exposed to an initial value, individuals tend to use it as an anchor, causing their subsequent estimates to be closer to this anchor than they would otherwise be.
Adjustments made from the anchor are often insufficient, leading to skewed estimates that can influence various decisions, such as purchasing decisions and business forecasting.
Negotiation and Value Setting
Negotiation and value setting are susceptible to anchoring bias as well. For instance, when a seller sets an initial price for a product, potential buyers may see this value as a starting point for negotiation, even if the price is much higher than the item’s actual worth.
As a result, buyers might agree to a final value that is inflated due to the influence of this initial anchor. Conversely, a buyer may present a low anchor, leading the seller to settle for a lower price than initially intended.
Goal Setting and Satisfaction
When individuals set goals for themselves, they may unknowingly use an anchor, such as a past experience or an external benchmark. This anchor may influence their perception of what’s achievable and impact the goals they set.
Furthermore, the anchoring effect influences satisfaction as individuals evaluate their achievements. For example, if they anchor their expectations to a high standard, they may feel dissatisfied with their progress, even if they have made significant improvements.
On the other hand, if they set a low anchor, they could feel satisfaction in surpassing their initial expectations, regardless of whether these achievements are objectively significant.
Individual Differences in Anchoring Bias
Although the anchoring effect is one of experimental psychology’s most dependable findings, researchers have only lately begun to investigate the impact of individual differences in vulnerability to this cognitive bias.
Personality traits play a vital role in how one processes information and makes decisions. For example, some individuals may have a higher tendency to rely on initial information (anchors), while others who are more questioning and skeptical might adjust their judgments more effectively.
The anchoring effect, suggested psychologists Amos Tversky and Daniel Kahneman, is the result of anchoring and adjustment heuristics, in which estimations are formed beginning with an anchor value and subsequently adjusted in until the person arrives at a solution. According to Kahneman, knowledge that is consistent with anchors is the source of anchoring.
Experience and Knowledge
Expertise and knowledge in a specific field also affect the anchoring bias. Individuals who are more knowledgeable and experienced in a particular domain tend to be less susceptible to anchoring bias when dealing with relevant tasks, as they may rely on their prior experience and knowledge instead of being influenced by external cues. However, it is essential to note that even experts can fall prey to the anchoring effect in unfamiliar situations or under pressure.
In a study by Adrian Furnham, Hua Chu Boo, and Alistair McClelland, participants were asked to complete four anchoring tasks, each with a greater or lower anchor. The participants took a personality exam that assessed cognitive processes, IQ, and individual factors such as extroversion and introversion. Furnham discovered a link between high levels of conscientiousness and extraversion and anchoring biases.
Overconfidence
Overconfidence stems from the anchoring bias effect and refers to a behavioural tendency to take their initial assessment and place more emphasis on it while making a full assessment. Tversky and Kahneman proposed that subjects explicitly establish anchors in their estimates to help reduce overconfidence.
However, overconfidence is mostly caused by other factors, such as the personal cognitive traits of knowledge and decision-making ability, which reduces the likelihood of seeking external sources of confirmation. This component has also been demonstrated to appear with more challenging assignments.
Heuristics Experimental Findings
In their ground-breaking research, Amos Tversky and Daniel Kahneman first introduced the anchoring bias effect concept in their 1974 paper titled Judgment Under Uncertainty: Heuristics and Biases. They described the anchoring effect as a mental shortcut that people use while making decisions or judgments, in which information or a specific value is used as a reference point (anchor) to adjust subsequent judgments.
The bias occurs when individuals give a high amount of emphasis on an initial piece of information, which subsequently influences their decisions. Tversky and Kahneman conducted various experiments to showcase how this cognitive bias can affect a person’s decision-making process.
Strack and Mussweiler’s Study
A study conducted by Strack and Mussweiler in the 1990s explored the anchoring and adjustment heuristic further, supporting the implications of the anchoring effect on people’s judgments. Their experiment asked participants to estimate the year of Albert Einstein’s death using a given anchor (1960 or 1930).
The results showed that the participants’ estimates were indeed influenced by the anchor, illustrating how the anchoring effect can unconsciously sway a person’s judgment, even in a situation with factual information.
Dan Ariely’s Experiments
Behavioural economist Dan Ariely has conducted various experiments on the anchoring bias to showcase its impact on different contexts and aspects of decision-making. In one of his well-known experiments,
Ariely and his colleagues demonstrated the effects of anchoring bias on the pricing of consumer products. They found that individuals exposed to an initial, arbitrary price of a product often used that price as a reference point when estimating the value of similar products.
Criticisms and Limitations
While the effect has been extensively studied, some criticisms and limitations are associated with this concept. One limitation is that the anchoring bias may not be as influential in all judgment tasks or contexts.
For instance, certain situations or types of decisions may render the anchor less effective in shaping decisions. Moreover, these discrepancies can make providing a universally applicable characterization of the anchoring bias difficult.
Another criticism is that the study of anchoring is often carried out in controlled laboratory settings, where the experimental conditions might differ significantly from real-life decision-making scenarios. This may consequently limit the external validity of the research findings and the effectiveness of interventions designed to mitigate the anchoring effect.
Understanding individual differences in susceptibility to the bias is also crucial. Factors such as education, cognitive abilities, and expertise could potentially influence the degree to which an individual is affected by this bias.
However, the extant literature on anchoring bias does not sufficiently delve into the role of these individual differences. This gap in knowledge makes it challenging to develop personalized strategies to overcome anchoring based on an individual’s specific needs and strengths.
Finally, anchoring bias is just one of many cognitive biases that influence decision-making. Focusing solely on understanding and mitigating anchoring might not be enough to effectively reduce overall biases in decision-making. A more comprehensive approach should encompass the identification and mitigation of multiple cognitive biases in order to achieve a well-rounded improvement in decision-making processes.
References:
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Last Updated on December 16, 2023