Anchoring effect

The anchoring effect is a psychological phenomenon in which an individual's judgments or decisions are influenced by a reference point or "anchor" which can be completely irrelevant. The original description of the anchoring effect came from psychophysics. When judging stimuli along a continuum, it was noticed that the first and last stimuli were used to compare the other stimuli (this is also referred to as "end anchoring"). This concept was notably formalized in behavioral economics by Amos Tversky and Daniel Kahneman. In their seminal 1974 work, they described anchoring as a heuristic used to make estimates under uncertainty. Both numeric and non-numeric anchoring have been reported through research. In numeric anchoring, once the value of the anchor is set, subsequent arguments, estimates, etc. made by an individual may change from what they would have otherwise been without the anchor. For example, an individual may be more likely to purchase a car if it is placed alongside a more expensive model (the anchor). Non-numeric anchoring has been observed in physical judgments involving length, weight, and volume.

The anchoring effect is a psychological phenomenon in which an individual's judgments or decisions are influenced by a reference point or "anchor" which can be completely irrelevant. The original description of the anchoring effect came from psychophysics. When judging stimuli along a continuum, it was noticed that the first and last stimuli were used to compare the other stimuli (this is also referred to as "end anchoring"). This concept was notably formalized in behavioral economics by Amos Tversky and Daniel Kahneman. In their seminal 1974 work, they described anchoring as a heuristic used to make estimates under uncertainty. Both numeric and non-numeric anchoring have been reported through research. In numeric anchoring, once the value of the anchor is set, subsequent arguments, estimates, etc. made by an individual may change from what they would have otherwise been without the anchor. For example, an individual may be more likely to purchase a car if it is placed alongside a more expensive model (the anchor). Non-numeric anchoring has been observed in physical judgments involving length, weight, and volume.

Experimental findings

, one of the first researchers to study anchoring]] The anchoring and adjustment heuristic was first theorized by Amos Tversky and Daniel Kahneman. In one of their first studies, participants were separated into one of two conditions, and either asked to compute, within 5 seconds, the product of the numbers one through to eight, either as or reversed as . Because participants did not have enough time to calculate the full answer, they had to make an estimate after their first few multiplications. When these first multiplications gave a small answer – because the sequence started with small numbers – the median estimate was 512; when the sequence started with the larger numbers, the median estimate was 2,250. (The correct answer is 40,320.) In another study by Tversky and Kahneman, participants were asked to estimate the percentage of African countries in the United Nations. Before estimating, the participants first observed a roulette wheel that was predetermined to stop on either 10 or 65. Participants whose wheel stopped on 10 guessed lower values (25% on average) than participants whose wheel stopped at 65 (45% on average). The pattern has held in other experiments for a wide variety of different subjects of estimation. As a second example, in a study by Dan Ariely, an audience is first asked to write the last two digits of their social security number and consider whether they would pay this number of dollars for items whose value they did not know, such as wine, chocolate and computer equipment. They were then asked to bid for these items, with the result that the audience members with higher two-digit numbers would submit bids that were between 60 percent¹ and 120 percent higher than those with the lower social security numbers, which had become their anchor. When asked if they believed the number was informative of the value of the item, quite a few said yes. Trying to avoid this confusion, a small number of studies used procedures that were clearly random, such as Excel random generator button and die roll, and failed to replicate anchoring effects. The anchoring effect has also been documented in real estate markets. In one study in the Journal of Real Estate Research, it was established that the 2-year and 9-year highs on the Case-Shiller House Price Index could be used as anchors in predicting current house prices. The findings were used to indicate that, in forecasting house prices, these 2-year and 9-years highs might be relevant. In behavioral finance, anchoring has been observed in stock-purchase decisions. A study found that when using an app-based stock brokerage, an investor's first stock purchase price serves as an anchor for future stock purchases. The findings indicate that when investors start by making only a small stock purchase, they end up with less accumulated investments in the long run.

Durability of anchoring

Anchoring effects are also shown to remain adequately present given the accessibility of knowledge pertaining to the target. This, in turn, suggests that despite a delay in judgement towards a target, the extent of anchoring effects have seen to remain unmitigated within a given time period. A series of three experiments were conducted to test the longevity of anchoring effects. It was observed that despite a delay of one week being introduced for half the sample population of each experiment, similar results of immediate judgement and delayed judgement of the target were achieved. The experiments concluded that external information experienced within the delayed judgement period shows little influence relative to self-generated anchors even with commonly encountered targets (temperature) used in one of the experiments, showing that anchoring effects may precede priming in duration especially when the anchoring effects were formed during the task. Further research to conclude an effect that is effectively retained over a substantial period of time has proven inconsistent.

Anchoring bias in groups

It is often presumed that groups come to a more unbiased decision relative to individuals. However, this assumption is supported with varied findings that could not come to a general consensus. Nevertheless, while some groups are able to perform better than an individual member, they are found to be just as biased or even more biased relative to their individual counterparts. A possible cause would be the discriminatory fashion in which information is communicated, processed and aggregated based on each individual's anchored knowledge and belief. This results in a diminished quality in the decision-making process and consequently, amplifies the pre-existing anchored biases. The cause of group anchoring remains unsure. Group anchors may have been established at the group level or may simply be the culmination of several individual's personal anchors. Prior studies have shown that when given an anchor before the experiment, individual members consolidated the respective anchors to attain a decision in the direction of the anchor placed. However, a distinction between individual and group-based anchor biases does exist, with groups tending to ignore or disregard external information due to the confidence in the joint decision-making process. The presence of pre-anchor preferences also impeded the extent to which external anchors affected the group decision, as groups tend to allocate more weight to self-generated anchors, according to the 'competing anchor hypothesis'. Recently, it has been suggested that the group member who speaks first often has an unproportionally high impact on the final decision. A series of experiments were conducted to investigate anchoring bias in groups and possible solutions to avoid or mitigate anchoring. The first experiment established that groups are indeed influenced by anchors while the other two experiments highlighted methods to overcome group anchoring bias. Methods that were utilized include the use of process accountability and motivation through competition instead of cooperation to reduce the influence of anchors within groups.

Causes

The present literature does not reach a consensus as to the cause of anchoring. However, scholars agree that anchoring is a phenomenon that can be easily demonstrated but is hard to explain. Some scholars suggest that anchoring is, in fact, caused by a combination of factors.

Selective accessibility

An alternative explanation of the anchoring effect is the idea that the accessibility of anchor-consistent information is enhanced when individuals consider it as a potential answer. After determining that the initial anchor is not the correct answer, they move on to consider other possibilities. However, because the anchor was just made salient and accessible to them, they will take the anchor into consideration while evaluating other possibilities. As a result, this comparative assessment can result in answers that are disproportionally consistent with the anchor. In this sense, anchoring is a special case of semantic priming, where the anchor acts as the prime. Unlike anchoring-and-adjusting, this theory suggests that people consider the relevant attributes of the initial anchor to determine if the anchor is plausible. Rather than accepting any plausible anchor as their answer and insufficiently adjusting anchors outside of the acceptable range, people will remain motivated to find a more accurate answer after rejecting the initial anchor. The preceding adjustments that individuals make are relevant to the anchor because people evaluate hypotheses through attempting to confirm them. In line with this idea, when investigating whether the plausibility of an anchor affects comparative and absolute judgments, Strack and Mussweiler found that individuals take longer to provide an absolute judgment when the anchor is implausible. Comparative judgments refer to the process of using an anchor to determine the final answer. Most paradigms used in anchoring studies also ask participants to provide an absolute judgment (i.e., provide a concrete number as their answer) after comparative judgments. When plausible anchors were used in comparative judgments, the anchor became more accessible, shortening the response time for consequent absolute judgments. In contrast, implausible anchors result in longer response time because there is no relevant information that can be used as primes. Although selective accessibility and anchoring-and-adjusting provide conflicting explanations for the anchoring effect, some scholars have argued that anchoring is influenced by multiple factors, and these theories complement each other in explaining the anchoring effect. For instance, Simmons and colleagues proposed an integrative theory suggesting that an anchor can result in selective reliance on anchor-consistent information, rendering the range of plausible answers closer to the anchor. On the other hand, people adjust away from (or possibly back toward) anchors before settling on their final estimate. This integrative theory is more parsimonious because it suggests that neither the source of the anchor (self-generated or provided) nor the plausibility of the anchor has a significant effect on judgments.

Influencing factors

Cognitive ability

The impact of cognitive ability on anchoring is contested. Predrag Teovanović's investigated whether intelligence, cognitive reflection and personality traits affects the presence of anchoring effect in decision-making. Although measures of individual differences in susceptibility to anchoring were reliable, individual differences only explain a small portion of the variation. However, intelligence is negatively correlated with anchoring for participants who are more reflective. By critically thinking about their process of decision-making, reflective individuals might realize the unreasonable reliance on anchors and insufficient adjustments. Similarly, Welsh and colleagues found a weak, negative correlation between aptitude for rationality and overall cognitive measures and anchoring susceptibility. A study on willingness to pay for consumer goods found that anchoring decreased in those with greater cognitive ability, though it did not disappear. Research supporting individual differences in anchoring suggests that individuals who recognize the potential bias of anchoring and actively reflect on their decision-making process tend to be less susceptible to its effects. By critically assessing whether their judgments are based on reliable data or influenced by arbitrary anchors, they are more likely to identify and correct for insufficient adjustments, or choose not to use unreliable anchors at all. Another study, however, found that cognitive ability had no significant effect on how likely people were to use anchoring. In a poker-like experiment that included people of differing academic achievement and psychometric reasoning scoring, it has been found that anchoring is not related to education level. It also found that numerical reasoning and reflection scores had a negative association with anchoring susceptibility.

Overconfidence

Overconfidence is significantly associated with the anchoring effect. It refers specifically to the tendency for individuals to place excessive weight on their initial estimates and insufficient weight on new information leading to cognitive conceit. Cognitive conceit or overconfidence arises from other factors like personal cognitive attributes such as knowledge and decision-making ability, decreasing the probability to pursue external sources of confirmation. This factor has also been shown to arise with tasks with greater difficulty. Even within subject matter experts, they were also prey to such behaviour of overconfidence and should more so, actively reduce such behaviour. Following the study of estimations under uncertain, despite several attempts to curb overconfidence proving unsuccessful, Tversky and Kahneman suggest an effective solution to overconfidence is for subjects to explicitly establish anchors to help reduce overconfidence in their estimates.

Personal experience

Early research found that experts (those with high knowledge, experience, or expertise in some field) were more resistant to the anchoring effect. However, anchoring happens unconsciously which means that unless someone who is knowledgeable is warned prior, they are still susceptible to anchoring. Since then, however, numerous studies have demonstrated that while experience can sometimes reduce the effect, even experts are susceptible to anchoring. In a study concerning the effects of anchoring on judicial decisions, researchers found that even experienced legal professionals were affected by anchoring. This remained true even when the anchors provided were arbitrary and unrelated to the case in question. Also, this relates to goal setting, where more experienced individuals will set goals based on their past experiences which consequently affects end results in negotiations. Expertise is typically defined as domain-specific knowledge and experience. In a study using price estimation of cars, it was found that relevant knowledge positively influenced anchoring. Expertise in cognitive bias is related to experience however the two are not exclusively exhaustive. In a study using stock return estimates, it was found that expertise decreases behavioural bias significantly. It was found that other factors like cognitive ability and experience where there is no susceptibility to anchoring or a susceptibility as it increases, tend to become factors that decrease the effects of anchoring when they are an expert.

Motivation/rewards

The motivation to be accurate in one's judgements seem to have mixed effects on the strength of anchoring. On one hand, According to Wegener's attitude change theory, it was widely accepted that the prevalent effects of anchoring was due to the pathway of low-elaboration, non-thoughtful processes. The lack of reward or consequences results in the assumption that anchors are a reasonable hint to the correct answer without considering contextual differences, categorical differences, or even the relevance of the anchor. There is also evidence that the effects of anchoring is diminished when there is prior warning about the phenomenon of insufficient adjustment and self-generated anchors. However, there is also conflicting evidence where increases in motivation does not correlate to a lowered rate of anchoring. There were no differences in the effects of anchoring when comparing participants who were offered monetary rewards for accurate answers to those who weren't. Moreover, findings by Wilson et al. (1996) concluded that incentives and forewarnings did not eliminate anchoring effects. This could be explained by high elaborative anchoring - When motivated to be accurate, participants engage in more cognitively demanding thought processes, searching for existing information, including prior experiences and established anchors. The high need for accuracy lead to more effortful thought processes, and putting a heavier emphasis on anchors since they are representations of prior knowledge in what we perceive as similar categories. Findings have demonstrated that both a high and low need to be accurate result in susceptibility to the influence of anchoring effects, even when one is motivated to explicitly avoid them.

Mood

A wide range of research has linked sad or depressed moods with more extensive and accurate evaluation of problems. As a result of this, earlier studies hypothesized that people with more depressed moods would tend to use anchoring less than those with happier moods. However, more recent studies have shown the opposite effect: sad people are more likely to use anchoring than people with happy or neutral mood. In a study focusing on medical practitioners, it was found that physicians that possess positive moods are less susceptible to anchoring bias, when compared to physicians with neutral moods. Researchers suggested that positive mood promotes more systematic information processing, which can reduce susceptibility to anchoring.

Culture

Culture has been identified as an influencing factor in susceptibility to the anchoring effect. Research distinguishes between the holistic thinking style, predominant in East and Southeast Asian cultures, and the analytic thinking style, common in Western cultures. A study comparing students from Poland and India found that while both groups were affected by anchoring, the degree of susceptibility varied significantly by cultural background. Polish students demonstrated lower susceptibility to anchoring compared to Indian students. Additionally, cultural differences in overconfidence were observed, with Indian students displaying a higher rate of overprecision compared to Polish students. This is explained by the cultural difference in tolerances for ambiguity and risk (uncertainty avoidance), with Poland scoring high and India scoring medium to low on Hofstede's Uncertainty Avoidance Index (UAI).

Applications

See also

Bandwagon effect Confirmation bias Framing effect Law of the instrument List of cognitive biases Matthew effect Negotiation strategies Poisoning the well Primacy effect

References

External links

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