EVER wonder why you keep on spending money even if you know you should save and invest it? Most likely you are being stirred up to buy using simulated anchors.
What does “anchoring” mean?
The anchoring effect or anchor bias is a cognitive bias that occurs when people rely heavily on the first piece of information presented to them. These “anchors” function as a reference point in influencing their decision-making.
Companies, retailers and salespeople are skillfully aware of this human tendency to anchor decisions based on the first information buyers have and wield their prospects’ actions to their advantage.
Price is the best anchor these merchants utilize to make people buy. It also serves as a trigger feature for them to pay for goods or services as it systematically distorts their sense of value.
Experts revealed that by reacting solely to the price feature of an item, they were playing a shortcut version of betting the odds. Instead of doing their due diligence in assessing the worth of an item, they usually associate their judgment with one single factor, its price.
Let’s say, for example, you wish to buy a condominium unit.
You set a schedule with a real estate agent to do an ocular visit to their showroom and inquire about the units for sale. Typically, the agent will initially exhibit a lavish and premium unit. They will show you around and make you daydream one day you will own this fancy unit. You want it; however, you can’t afford it. Don’t worry because the agent has more units available for you to choose from. Besides, the succeeding units he will show you are more affordable.
I hate to break this to you but that lavish premium unit is not for sale. It’s called “setup properties.” From the phrase itself, “setup properties” sets up the mind of the buyers to the exorbitant price tag. This will suffice as the anchor for your selection. Forget the extra amenities of that lavish unit, for your mind is already stuck on that hefty price tag.
As a result, your price negotiation then will be dependent on the anchors they primed; and once the agent presents you the modestly-priced units, you will undoubtedly sign the contract soon after and the happy agent walks out with their fat commission.
Another example where price anchoring occurs is in retail stores. Allow me to share with you a personal story.
A long time ago, I dropped by a shoe retailer and checked for a pair of training sneakers to replace my old ones. My old shoes are still functional despite showing shabbiness. Despite that, a specific pair of black training shoes caught my eye. The next thing I knew, I was already behind the counter paying for this pair of shoes unwilling to let go. Hereupon, I made a self-justification why I needed to have this pair of shoes now. This psychological phenomenon is termed cognitive dissonance in behavioral science.
And the culprit?
The two different price tags stuck on the sole of that shoe on display. The original price sticker and a discounted price sticker. It was 50-percent less, was the last pair and was surprisingly in my size. What are the odds, right?
Initially, I was happy with my new possession. But the happy hormones faded away as soon as I got home when I realized my purchase was unnecessary and impulsive. Therefore, the cognitive dissonance continued. This time it was contrary to my first stand.
Given these circumstances, how can you counter those subconscious attacks on your decision-making?
To avoid the anchoring bias, familiarize yourself with the possibility of fake anchors already put in place even before you enter their store. Express your gratitude to the seller’s assistance, walk out of the store, look for more options but stick to a maximum of three to five sellers and compare them before you make your final judgment.
Authors Bob Burg and John David Mann illustrated one of the sales tactics commonly used in negotiation in their book, “Whoever sets the frame of the conversation, also sets the direction and tone in which it will go.”
Price anchors are the best way to set the frame of the conversation.
The most effective way to avoid anchoring bias is awareness and detecting it instantly. Our minds will always be vulnerable to anchors. It’s everywhere—from shopping, to building relationships, to business dealings or even investing. Once you recognize that there will be staged anchors set for you to close the deal, you will redeem your freedom in making better financial decisions in the future.
Edmund Lao is a registered financial planner of RFP Philippines. To learn more about personal-financial planning, attend the 101st RFP program this May 2023. To inquire, e-mail info@rfp.ph or text <name><e-mail> <RFP> at 0917-6248110.