Anchoring

1
Anchoring Adjustment Comparing multiple options

• How nearby comparisons drives choice

The outline for the behavioral economics
curriculum component, Using judgment and
decision-making concepts to encourage positive
life choices is at rjames.myweb.uga.edu/outline.h
tm
2
Our choices and our satisfaction are driven by
the comparisons we make
Nearby additional
Alternative
Future
Past
Expected
Current
Multiple Alternative
Relevant Observed
3
Behavioral Economics Concepts
Loss Aversion Endowment Effect Status Quo Bias
Availability Effects
Endogenous Determination of Time Preference
Nearby additional
Alternative
Future
Past
Expected
Current
Hedonic Adaptation
Placebo Effect Stereotypes
Multiple Alternative
Anchoring
Paradox of Choice
Peer Effects Relative Standing
Relevant Observed
4
Business students were asked, would you be
willing to pay the last 2 digits of your social
security number for each item (e.g., 34 34)?
Next, each bid the maximum amount they would be
willing to pay for each item. Question Did the
initial anchor amount influence each students
ultimate bids?
5
Nearby comparison and choice anchoring and
adjustment

• Result
• Although students were reminded that the social
  security number is a random quantity conveying no
  information, those who happened to have high
  social security numbers were willing to pay much
  more for the products.

Ariely, D. (MIT), Lowenstein, G. (Carnegie
Mellon), Prelec, D. (MIT), 2006, Tom Sawyer and
the construction of value. Journal of Economic
Behavior Organization, 1-10.
6
Anchoring

• The tendency of people to determine value by
• start with a convenient nearby reference point
  (the anchor) and then
• estimate value by making adjustments from that
  reference point

7
An experiment on anchoring
Half were asked, Would you listen to me read 15
minutes of poetry outside of class if I paid you
2 to attend?
Half were asked, Would you listen to me read 15
minutes of poetry outside of class if it cost you
2 to attend?
After answering, all students were then told that
the poetry reading would be free and were asked
if they wanted to attend.
8
Nearby comparison and choice anchoring and
adjustment

• Experiment
• Business students were told their professor would
  be doing a 15-minute poetry reading. Half were
  asked if they would be willing to pay 2 to
  attend and half were asked if they would be
  willing to attend if they were paid 2. After
  answering, students were then told that the
  poetry reading would be free and were asked if
  they wanted to attend.
• Question
• Would the initial anchoring of the experiences
  value affect who would attend for free?

Ariely, D. (MIT), Lowenstein, G. (Carnegie
Mellon), Prelec, D. (MIT), 2006, Tom Sawyer and
the construction of value. Journal of Economic
Behavior Organization, 1-10.
9
Nearby comparison and choice anchoring and
adjustment

• Experiment
• Business students were told their professor would
  be doing a 15-minute poetry reading. Half were
  asked if they would be willing to pay 2 to
  attend and half were asked if they would be
  willing to attend if they were paid 2. After
  answering, students were then told that the
  poetry reading would be free and were asked if
  they wanted to attend.
• Result
• Of those who had been asked about being paid, 8
  were willing to attend for free.
• Of those who had been asked about paying, 35
  were willing to attend for free.

Ariely, D. (MIT), Lowenstein, G. (Carnegie
Mellon), Prelec, D. (MIT), 2006, Tom Sawyer and
the construction of value. Journal of Economic
Behavior Organization, 1-10.
10
Nearby comparison and choice anchoring and
adjustment

• Experiment
• Same poetry reading experiment, but now the
  professor read poetry for 1 minute so that
  students actually experienced it first. One
  group was then asked if they would be willing to
  pay (random), the other group if they would be
  willing to attend if paid (random).
• Question
• Would the anchoring effect go away when people
  were allowed to sample the experience first?

Ariely, D. (MIT), Lowenstein, G. (Carnegie
Mellon), Prelec, D. (MIT), 2006, Tom Sawyer and
the construction of value. Journal of Economic
Behavior Organization, 1-10.
11
Nearby comparison and choice anchoring and
adjustment

• Experiment
• Same poetry reading experiment, but now the
  professor read poetry for 1 minute so that
  students actually experienced it first. One
  group was then asked if they would be willing to
  pay (random), the other group if they would be
  willing to attend if paid (random).
• Result
• Of those who had been asked about being paid, 9
  were then willing to attend for free.
• Of those who had been asked about paying, 49
  were then willing to attend for free.

Ariely, D. (MIT), Lowenstein, G. (Carnegie
Mellon), Prelec, D. (MIT), 2006, Tom Sawyer and
the construction of value. Journal of Economic
Behavior Organization, 1-10.
12
Nearby comparison and choice anchoring and
adjustment
Professor Dan Ariely (Duke), experimented with
two types of subscription offers to The Economist
magazine with his students.

• Which offer do you think was most popular?
• The first
• The second
• The third
• All were about equal
• The first and third were about equal

13
Results

• When these three choices were presented

16
0
84
14
Results

• Some were given only these two choices. Should
  the preferences be different for those without
  the second choice?

15
Results

• When only two choices were presented

16
68
X
0
84
32
16
Nearby comparison and choice anchoring and
adjustment
The presence of the comparably worse nearby
option, made the third option seem better.
16
84
17
Nearby comparison and choice
Without the comparably worse nearby option, the
relative preference reversed.
16
68
84
32
18
Nearby comparison and choice

• First group could have either 9 or a nice pen

Second group could have 9, a nice pen, or an
uglier pen
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Nearby comparison drives choice anchoring and
adjustment

• Group A (106 people) could have either 9 or a
  nice pen.
• Group B (115 people) could have either 9, a nice
  pen, or an ugly pen.
• Results

Simonson, I. (UC-Berkeley) Tversky, A.
(Stanford), 1992, Choice in context Tradeoff
contrast and extreme aversion. Journal of
Marketing Research, 29, 281-295.
20
Nearby comparison drives choice anchoring and
adjustment

• When bread makers were new
• Williams-Sonoma, a mail-order and retail
  business located in San Francisco, used to offer
  one home bread maker priced at 275. Later, a
  second home bread maker was added, which had
  similar features except for its larger size. The
  new item was priced more than 50 higher than the
  original bread maker. Williams-Sonoma did not
  sell many units of the new (relatively
  overpriced) item, but the sales of the less
  expensive bread maker almost doubled.

Simonson, I. (Stanford), 1999, The effect of
product assortment on buyer preferences, Journal
of Retailing, 75(3), 347-370.
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Nearby comparisons in physical attraction?

• Video segment from Prof. Ariely (Duke) lecture
• 3_Faces.wmv
• http//www.youtube.com/watch?v9X68dm92HVI
• From 1430-1554

22
Summary

• Our choices are driven by the nearby comparisons
  we make.
• If we intentionally structure our choice options
  and our nearby comparisons to align with our
  long-term goals, we will succeed.