The anchoring effect is a financial bias you see every day. It affects your decision-making about food, clothes and other things to buy. It’s not easy to avoid, but you can learn to recognize it and make sure it doesn’t hurt your finances.
How many times have you gone to buy a birthday present and been taken in by the first thing you hear about a product? You probably buy products or pay for services often to satisfy a need. Cognitive biases that inform your perception about a product or service without you knowing it can play a role in how you spend your money. The “anchoring” or “focalism” effect is one such cognitive bias. Here we tell you what it’s about.
The brainchild of psychologists Daniel Kahneman and Amos Tversky, the anchoring effect is a cognitive bias that explains why people make some purchasing decisions based on price, quality and other basic details. However, the information you receive and process (the “anchor”) is incomplete. Once it drops anchor, it shapes how you perceive the value and features of a product or service.
Imagine you see an advertisement for discounted detergent. It tells you what the detergent does best and that it’s price has been reduced for a limited period. Your brain might automatically think it’s a great opportunity to save money; but you haven’t really thought about how much you had wanted to spend nor have you compared the price to other detergents.
The price drop has anchored in your thoughts, and the product seems financially sound. The same happens when your compare two products based on a particular feature. In the case of different detergents, it might be the number of washes per bottle.
While common in sales and marketing, the anchoring effect goes beyond everyday products and services. For instance, it can take hold when fake news is perceived to be something real. It is also something you see with first impressions. You begin to form an idea about a person when you see, greet or hold a short conversation with them.
The anchoring effect and other cognitive biases are tough to avoid because they drive subjective thinking and behaviour. However, you can learn to recognize these biases and take action to prevent them impacting on your financial health. Check out these tips:
Avoid impulse buying
Feeling like you've found something “brand new” or "one of a kind" can spark curiosity and drives you to spend.
Check out a product’s features
Advertisements show a product’s best features. However, you should find out who makes it, the opinions of people who’ve bought it, and everything else there is to know.
Even if a product or service appears to be on offer, the discounted price might not be the cheapest it’s ever had.
Weigh up your needs
The first thing you should ask yourself when you go to buy something is if you really need it and, if so, why.
Remember your budget
The desire to take advantage of offers makes you buy things you don’t need or had not budgeted for.
Cognitive biases like the anchoring effect are all around us. To make sure they don’t hit your wallet, start by recognizing them and making small changes to keep your finances healthy in the short and long term.