The human mind is a fascinating creation. With it we move, breathe, consciously decide what to do and subconsciously do things with little knowledge of why or how we do them. With the help of our five senses, our brains help us make sense of the world around us. Despite its wonder our brains can be easily tricked. Consider the following:
The Placebo Effect – Many studies show when people believe they’re taking medicine their conditions improve just as if they took the actual medicine.
Magicians – These clever folks use their understanding of how the mind works to fool audience members into believing objects miraculously appear and disappear. I saw it with my own eyes!
Physical Comparisons – Have you ever gone to pick up something anticipating it was heavy and suddenly it felt light? Or perhaps you went to pick up something you assumed was light and it felt heavy. Ten pounds is ten pounds but sometimes ten pounds feels heavy and sometimes it feels light.
Sales – We’ve all bought things on sale feeling we got a great deal because we saved a certain percentage or dollar amount off of the list price. That good deal doesn’t seem so good when someone else announces they got the same item for even less that we paid!
There’s something that impacts us every day, which we give very little thought to and yet it makes a big difference in how we perceive things and the decisions we ultimately make. What I’m referring to are anchors but not the kind dropped over the side of a ship into the water. In psychology, according to Amos Tversky and Nobel Prize winner Daniel Kahneman, an anchor is “an initial value that serves as a benchmark or starting point for an unknown quantity.”
There are many things in life that we can’t accurately put a value on. For example let’s consider a house. A four bedroom, two and a half bath house with 3,000 square feet, a wooden deck, family room, dining room, kitchen and den might go for $250,000 in a small Midwestern town. The exact same home on an equivalent sized lot in Southern California might go for more than $500,000.
You might be thinking it’s because the market dictates a higher price in California than in the Midwest. No dispute there but the point would be this – the value you put on the home would be dictated in large part by the other values you learn about (the anchors).
Consider this experiment from Tversky and Kahneman. A wheel with numbers 1-100 is spun and is set to “randomly” stop on either 10 or 65. Let’s say it stopped on 10. Participants were then asked if the percentage of African nations in the United Nations is higher or lower than 10%. Next they were asked to make their best guess on the actual percentage. Those who saw the wheel stop at 65 were asked if the percentage of African nations in the United Nations is higher or lower than 65%. Then they were asked to guess the actual percentage.
For most people, estimating the percentage of African nations in the U.N. is nothing more than a guess. However, those who saw the wheel stop at 10 guessed 25% of the African nations were in the U.N., but for those who saw it stop on 65 the average guess was 45! That’s quite a difference. Each group was heavily influenced by the anchor they were exposed to before making their educated guess.
So what does this have to do with you and me? Think about all the things we’ve encountered over time with little or no thought about how the value was determined other than market forces:
Long distance charges – I remember when 25 cents a minute was a bargain. When charges were dropped to 10 cents we couldn’t believe it! Now it’s practically free on a per minute basis.
Newspapers – Some people still pay to get the weekly and/or weekend edition of their favorite newspaper. Others go online and see the same stories…for free! You could argue the online version is more valuable because it’s portable, updated multiple times and day and doesn’t create any waste.
Movies – We used to drive to Blockbuster and pay $8-$10 to rent two or three movies for the weekend. Now many of us watch nearly unlimited movies and shows on Netflix for just $8 a month.
In each instance what we paid and what we felt was a good deal, or bad deal, was impacted by the anchor because it served as a comparison point.
There are some things we can’t change and have little room to barter on. That’s why most Internet plans are in the ballpark of one another. But when it comes to things like buying homes and cars you should recognize your purchase price will be heavily impacted by a list price for a home or the MSRP (manufacturer’s suggested retail price) for a new car. You would do well to do some research beforehand and go into those situations with your own anchor to start bidding from. And remember this tidbit for negotiations; the person who puts out the first number sets the anchor and most of the time the negotiated price will be close to that number. Don’t let a good deal get aweigh from you.