How “Anchoring” Sways Your Decisions

My favorite places to shop are sites like 6pm.com and Last Call Neiman Marcus. I like the idea of buying a $400 dress for $80 because I get better quality for a good price. Even though I'm spending money, it's a little less painful when I can look at how much I “saved.”

That's a common sentiment — it's nice to reassure yourself that you got a great value for your money. But it turns out that my satisfaction isn't just because I bought a better quality item for $80, it's also because I factored the original price of $400 into my decision-making process.

The anchoring effect
An article in Psychology Today discusses this effect of related numbers, called “anchoring” by psychologists Amos Tversky and Daniel Kahneman, who discovered it in the 1970s. According to the article, “Whenever we try to estimate a numerical value, we are unconsciously influenced by related numbers just seen or thought about.” Numerous studies have backed up their findings that pricing comparisons have an effect on a consumer's decision-making process.

What's more, the anchoring effect isn't just limited to sales prices. The article explains how anchoring applies to the $69 hot dog at popular New York eatery Serendipity 3:

In this case, the diner in a touristy Manhattan restaurant is trying to decide how much he or she can afford to spend. The prices the diner is used to spending at home don't apply; it's a whole new world. That diner isn't about to order a $69 hot dog, but might happily opt for an $17.95 cheeseburger. The hot dog makes the cheeseburger appear reasonable in comparison (even though $17.95 would be a ridiculous price for a cheeseburger most places).

According to the article, the effects of anchoring are widely accepted by restaurant owners and consultants who use it to design menus. I had a related experience last year when I went to New York City. One night we ended up at an overpriced restaurant, paying something like $3 for a cup of mediocre coffee and $14 for a plate of eggs, bacon, and toast that tasted like something you'd get at IHOP. Compared to everything else on the menu, it was pretty cheap (under $25 at least), and since we were tired, hungry, and cold, we gave in and ordered.

If you had told me before I left for New York that I'd pay that much for such disappointing food, I'd never have believed you. But in those circumstances I cared more about not being cold and hungry and not spending $25.

The other side of anchoring
Hyman also explains that anchoring can have an opposite affect:

If I thought I would be able to buy something for around $20 and end up having to pay $39.99, this is an ugly situation. This time my anchor was low and was adjusted upwards. Bummer. Now I don't feel so good. I feel sick to my stomach if I spend more than I thought I should have to spend.

When you pay more than the anchored price, you're vulnerable to buyer's remorse.

Whether it's a $400 dress or a $69 hot dog, introducing those numbers to the consumer is extremely important because they sway the decision-making process. A $80 dress is too good to pass up when it was $400. “This is why stores leave the original price on a discounted item,” writes Ira Hyman in his article, Shopping Procrastination on Christmas Eve, “now you can see that this is worth more than you will be asked to pay for it. A price discount can improve the feelings that accompany spending money. It isn't how much you spent, but rather how you evaluate the entire situation.”

Likewise, when you evaluate the entire menu, an $14 plate of scrambled eggs appears relatively reasonable compared to the $25 plates. Oh well. At least the waitress was fun.

What are some of your own experiences with anchoring? Tell us in the comments!

More about...Psychology

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Funny about Money
Funny about Money
8 years ago

Interesting phenomenon. I’ve found myself spending more than I normally would at an upscale thrift shop BECAUSE I knew the upscale designer dress or purse cost many times what I was paying. Not sure the misadventure at the NY restaurant counts as anchor effect. It’s more like “extortion.” Or maybe “gouging.” New York eateries are notoriously overpriced. As a traveler to the city a) you probably have no way of finding a better, cheaper place to eat (at least not on short notice), and b) you have no way to prepare grocery-store food in a hotel room. You have to… Read more »

BB
BB
8 years ago

As someone who lives in the NYC metro area, I strongly disagree.
There are plenty of places to eat inexpensively, from Dunkin Donuts and its ilk to eateries patronized by natives. The free tour guide from AAA has plenty of places to eat, ranked by location and price.

Leah
Leah
8 years ago

My method for eating cheap in a new city is to follow the locals. Do you see a construction worker headed for a lunch break? Follow him. I have eaten great meals by looking for those folks. If you’re feeling bold, also ask someone who doesn’t look touristy. My friends warned my husband and I that we couldn’t eat cheaply when we went to NYC. But we never spent more than $10 each on meals, and we felt well fed. We ate some street cart food (hot dogs and a philly steak), pizza, and at some delis. There’s definitely gems… Read more »

Margaret
Margaret
8 years ago

I’ve lived in NYC most of my life and would never pay $15 of my own money for breakfast! But the restaurants in hotels are notoriously overpriced, especially in midtown (with one or two very rare and secret exceptions and I can’t remember the exact locations anyway). So, here’s a tip from a local: your best bet if you are stuck in midtown without a Cheap Eats Guide and want a good breakfast is to find a Greek diner or coffeeshop. There are plenty of good, cheap places to eat but you do need to do some research to find… Read more »

Jennifer Gwennifer
Jennifer Gwennifer
8 years ago

My mom and I used to shop like this A LOT when I was younger, especially at places like TJ Maxx. It was a fun game for two people who disliked shopping – find something that’s insanely marked down. For awhile I saved a tag off a dress I bought that was marked down 8 different times on the same tag from $150 to about $2 – it was like a 1st place trophy. I also think that when you’re used to shopping the bargain bins you start to value the deal more than the item itself. A dress for… Read more »

Dogs or Dollars
Dogs or Dollars
8 years ago

Agreed. I consciously try to disregard the original price of an item. $5 is still too much, if I don’t need it or am not going to wear it.

Interesting to think that the ‘anchor’ price may affect me, whether I want it to or not.

Laundry Lady
Laundry Lady
8 years ago

I can be especially vulnerable to this when it comes to kids clothing which is very much overpriced and often marked on sale. I have to decide before I hit the stores what I am willing to pay for an item. (For example: I found a $50 Rothchild dress coat for my daughter for $12 at the consignment sale in like new condition. I found another one I liked better for $25. Both were excellent deals and could be justified given the high price tag on a new, regular priced coat. But my price point goal was to spent $10-$15… Read more »

Beth
Beth
8 years ago

Good points, but I think marketers know this too 🙂 Let’s say you see a TV marked down $200 off the MSRP. Looks good, right? However, the posted MSRP is often more than what the store (or other stores) would normally charge for the TV. Perhaps with the “regular price” or MSRP as the anchor, we’re lured into thinking something is a better deal than it is? I think sometimes we also fall into the trap of thinking that because something is more expensive it’s better quality or a better deal when it’s marked down. The way I get around… Read more »

Nicole
Nicole
8 years ago

In college over the summer I worked for a survey firm. One of the surveys that we did was for a lawsuit against jewelry companies. Basically we called random people in a specific geographic area asking them if they’d bought jewelry in the past 6 months, and if so, had they paid full price. Nobody had. The lawsuit was specifically about this anchoring effect. The question being asked was, “If jewelry is never sold at full price, can you claim that that is the actual price?” That is, if something is never sold at the original price and is always… Read more »

Beth
Beth
8 years ago
Reply to  Nicole

A couple of clothing chains got in trouble for artificially raising and discounting prices a few years ago. Sadly, I haven’t seen any changes to their pricing policies since.

SB @ One Cent At A Time
SB @ One Cent At A Time
8 years ago
Reply to  Beth

I have seen, brand new inventory being offered at discount from day one. Can’t anyone stop this play? Its directly affects our mind and forces us to buy things we otherwise won’t buy.

Laura+Vanderkam
Laura+Vanderkam
8 years ago

I used to really get excited about shopping at places like TJ Maxx and Filene’s Basement for precisely this reason. I’m getting a $200 dress for $50! But then, total, I’d wind up spending more than I planned. Stores wouldn’t offer sales if they didn’t come out ahead on the deal.

Adam
Adam
8 years ago

A great read by the two psychologists mentioned in this post (Tversky and Kahneman) is “Judgment and Uncertainty: Heuristics and Biases”. Explains further the phenomenon that is “anchoring”. Ran into a similar situation just recently when I rationalized purchasing a scarf when initially I saw the full retail price and then the sales price later (50% off).

somedude
somedude
8 years ago

you may say that NY restaurants are overpriced, but having been born and raised in the city, I just think food every where else is ridiculously cheap.

Tessa
Tessa
8 years ago

I did this about a month ago buying a Christmas present. I bought a $500 TV because it was usually $950.
Afterward I saw that there were similar TVs for around $350.
I just felt like I was getting better quality becuse of the original price tag.

I also have a problem with spending extra money if I’m in a homegoods. “wow this serving piece used to be $40 and now it’s $15!”

Erika
Erika
8 years ago

This is fascinating! Thanks for drawing attention to it. I always knew that I was drawn to things that I got a “deal” on but I like that this article gives you insight into how your brain processes those decision. It will help me be more mindful. Thanks so much for writing about this.

Aaron
Aaron
8 years ago

Your example of the NYC breakfast is likely flawed because pricing isn’t just about the cost of goods used to make the breakfast. The overhead to run a diner in NYC is MUCH higher than in other cities, because of the cost of rent, cost of raw good delivery etc… Having visited NYC a few times, $14 for that kind of breakfast doesn’t seem that far off.

I highly doubt the diner is using anchoring in their pricing structure, it is likely more a result of the overhead costs.

babysteps
babysteps
8 years ago
Reply to  Aaron

Yes, food in NYC costs a lot more – at least in the high-end/tourist areas. Wine lists are another spot with plenty of anchors – we try to BYOB, and if the restaurant doesn’t allow that, we read the list carefully. The better-known wines usually are relatively more expensive (wine list price vs. retail price) compared to the lesser known stuff. Aside – for anyone traveling to NYC, 2 cheaper breakfast ideas: 1-bring your own (boiled eggs in a cooler pack last a week – if flying, freeze something that isn’t liquid to use as a cooler pack, for example… Read more »

Andrea
Andrea
8 years ago
Reply to  babysteps

Yes – plenty of places have made to order eggs/toast/panckaes you just don’t get table service. And I always get great reasonable veggie chinese food in Chinatown in NYC.

Sam
Sam
8 years ago

Yes, I very much take this into consideration. In clothes and shoes, I generally shop the same brands over and over again. I know the sizes, the fits work well, the quality, I like the look, etc. But I really do hate to pay full price, so I often will shop online, pick out what I love, need, want at full price and stick it in my virtual shopping basket. When a sale comes around or I get a coupon in the mail I will revisit my shopping basket and if I still love, need, want those items I had… Read more »

Lisa Cooper
Lisa Cooper
8 years ago

I seem to be naturally immune to anchoring. Two of my kids, too, but the other two have a hard time grasping financial concepts. What I’ve had more trouble figuring out is when its worth it to pay more for an item because it is better quality. The Internet helps tremendously in researching what’s worth paying for and what’s not.

Beth
Beth
8 years ago
Reply to  Lisa Cooper

Online reviews have saved me a lot of money! I look for the negative ones and decide if the flaws are something I can live with.

I use Facebook and Twitter to ask my friends too. It’s helpful to hear what they like and don’t like — and how they got a really good deal.

L
L
8 years ago
Reply to  Beth

I have a hard time trusting reviews after reading that some are paid reviews, even on websites such as Amazon. Does anyone have any experience on this subject?

Beth
Beth
8 years ago
Reply to  L

I skip the positive reviews and read the middle to low ones. For instance, if there’s a rating system from 1-5, I see how many people score the product 1-3 and see what they do and don’t like about the product. I do the the 4-5, but I pay more attention to the ones that point out some negative points too.

A lot of sites delete negative reviews, so sometimes this strategy isn’t helpful though.

Greg Miliates
Greg Miliates
8 years ago

You can use anchoring to your advantage, whether it’s negotiating for a raise, your salary, or the price of an item. While some people think that whoever gives out the first negotiating number loses; I disagree. Instead, YOU should be the one to set the anchor, so that the negotiation is centered around the number that you initially put out. For example, when negotiating your salary or a raise, make your anchor number significantly more than your currently salary, but justified by your value to the company. Maybe a 40% increase is warranted, so ask for 50% (since it’ll likely… Read more »

ElliotW
ElliotW
8 years ago

Great article! The 4 letters I hate hearing about: MSRP. If you ever watch pawn stars, Rick always says “you can ask anything you want, but what matters is what some one is willing to pay” My gf falls for this all the time with the online “sales” especially with all the groupon and living social deals.

Elaine
Elaine
8 years ago

I don’t think the story sounds like anchoring,(put your anchor is and be stabe) it sounds more like rationalization.

Tyler Karaszewski
Tyler Karaszewski
8 years ago

I have been to that serendipity place. The food is mediocre, and really the only reason to go there is because it was in some movie. I find it a bit infuriating but often defeatible when people do this online. Just the other day I was looking at a camera lens for sale online. It was listed at $1,236.00, discounted from $2,300.00! Sounds like a huge discount, right? Well, if you go look up the lens at the manufacturer’s site (Canon), MSRP for it is $1,399.00. That discount looks a lot smaller all of a sudden, huh? If nobody has… Read more »

Tyler Karaszewski
Tyler Karaszewski
8 years ago

Should read “actual offered price is at least as high as what it’s actually worth”, editing comments doesn’t work on the iPad.

Rick W
Rick W
8 years ago

Anchoring doesn’t just work with consumer goods and salaries. It also works with charities and not-for-profits. In college, the student television station I helped with started an alumni fundraising drive. An advertising student developed the drive and did a hell of a job with it. Donation materials listed five “levels” at which prospects could donate, with the highest level being $1000. It’s kind of outrageous to give a bunch of sketch comedy college kids running around with cameras a thousand bucks. We would have been happy to get five bucks for videotapes. But the presence of the high level option… Read more »

Angela
Angela
8 years ago
Reply to  Rick W

The “levels” approach is very smart on the part of non-profits… My alma mater was NOT smart when they first hit me up for a donation after graduation. They sent a letter to me just three months after I graduated that said my donation of “as little as $1000” would greatly benefit the school. I don’t know how they expected such a recent grad to have an extra $1000 ready to fork over. If they had listed levels of suggested donations, I probably would have sent them $25 or $50. Instead, I vowed never to send them a dime and… Read more »

Kyle @ EngageYourMoney.com
Kyle @ EngageYourMoney.com
8 years ago

This is never more true than in Vegas, when suddenly a $70 lunch seems like an ok price to pay. When you have to buying with $200 at the craps table, and you are better $90, $70 doesn’t seem so bad to get something tangible…

Neel V Kumar
Neel V Kumar
8 years ago

I would like to invoke Warren Buffet in this conversation. He has said that he would rather buy a terrific company at a fair price than a fair company at a terrific price.

I think we should apply the same thinking to shopping. We should be fine paying full-price on things that are really worth it than paying discounted price on unworthy items. And unfortunately, most brands are no longer making quality products.

Beth
Beth
8 years ago
Reply to  Neel V Kumar

Great quote, and I’m inclined to agree.

Sometimes I’ve bought clothing at full price if I’ve wanted to wear it right away (and wear it regularly). When you figure on cost per use for a season, sometimes it’s lower if you buy full price than wait a month or more for it to go on sale.

Samantha
Samantha
8 years ago

This directly relates to a book I once read, “Predictably Irrational; How Hidden Forces Shape our Decisions”. He had a example about how Williams Sonoma first introduced a bread machine and sales were slow. So they added a “deluxe” version that was 50% more expensive, and the cheaper one started flying off the shelves; the first machine now appeared to be a bargain! That is all about price anchoring, and retailers know exactly what they are doing! I’ve been seeing more and more of this lately, in advertising. Giant Eagle has a commercial right now where the lady directly says… Read more »

Ashley H
Ashley H
8 years ago

SO true…Kohl’s is a classic example. Everything is always on sale so you feel like you’re getting a great deal. But if it’s always on sale, is it really “worth” the original price to begin with?

Jo-Pete
Jo-Pete
8 years ago

One tip to help fight anchoring in your online shopping is to visit camelcamelcamel.com before making your purchase decision. They track the prices at a few common e-commerce sites to show you the actual history of the price. This is especially helpful for big sales, where you feel like you have to buy now or miss the price forever. In fact, some of those “hot deals” are the same price it’s been for the past month, and you can make the purchasing decision at your own pace.

Harmony
Harmony
8 years ago
Reply to  Jo-Pete

Hobby Lobby does this as well. Their fabric is ALWAYS 30% off. It is irritationg to need a calculator to find out the everyday price of a product.

Brian
Brian
8 years ago

This is why you always have to price compare between competing stores. You can’t trust the original price tag in comparison to the sales price. Comparing between competing stores can show a real bargain if one exists.

For instance I just bought a camera on Walmart.com for $89. It was on a big sale. Was it a good deal? I wasn’t sure until I found that I couldn’t get it for less that $135 on Amazon. I couldv’e shopped around elsewhere to reaffirm the value but you have to draw the line somewhere.

Mel
Mel
8 years ago

I think Samantha has been watching me! I have found some phenomenal deals on Coach on Ebay. I did give in buying a couple at the outlet recently. Coach also warranties their product. I recently bought a very large bag for $120. Yes, it’s a frivolous but I ended up building the cost into my fun budget. We all have our weaknesses. It has taken a lot of time but I have stopped falling for the thrill of “the deal” as often. Gail Vaz-Oxlade likes to say “it’s only a deal if you can afford it.”

Carrie Hetu
Carrie Hetu
8 years ago

Great article, and nice to be aware of. Generally speaking there is very little I buy at any store knowing you can find almost anything in mint condition and dirt cheap at garage sales if you live in a decent garage sale area. I have lived in a couple places though where if it was a garage sale it was garbage so I did use the anchor system for buying decisions.

I hate buying full price for anything! LOL

bryan
bryan
8 years ago

This is spot on, I was in the store and looking at a calvin klein jacket. The jacket retailed for $400, but was marked down to $150. I thought I was getting a great deal, until I looked at the fabric, it was 100% polyester! I could of gotten a similar jacket at walmart for $50 and it would of kept me just as warm!

KS
KS
8 years ago

I shop a lot at charity shops but have bought things I didn’t need because of “anchoring” (I think). Recently, I found a pair of Dansko clogs in my size, brand new, for €10. I bought them because I know they are €80 new and they are a brand I wear a lot. But I didn’t need another pair of black shoes! I told myself I could easily keep them aside until my current pair wears down, but at that time, I simply didn’t need them. I wouldn’t have bought any old shoes for €10, likely as not.

Emily Guy Birken
Emily Guy Birken
8 years ago

I’m fascinated by this and other aspects of Behavioral Economics. What really throws me is the fact that just thinking about any number (like the last 2 digits of your social security number) can anchor your thinking about a price. Daniel Ariely, the author of Predictably Irrational talks about an experiment where college students chose prices for unpriced items after writing down their last 2 SSN digits. Those with higher numbers priced the items higher and those with lower numbers chose lower prices.

I wrote a series about Behavioral Economics for Money Ning: http://moneyning.com/money-beliefs/how-anchoring-in-behavioral-economics-explains-your-irrational-money-choices/

Don Reeve
Don Reeve
8 years ago

What do you call it when the SELLER is not anchored to a certin price? I went to a yard sale and they guy just wanted to get rid of his 55 inch LG digital HD TV (1080 resolution). It need a new bulb, but he had all the parts that hold the bulb in the TV. He said he wanted the latest model, and that he wanted the latest model that utilized USB ports instead of the old male/female type plug in for extras, like an X-box game. I gave him the $5, thinking I’ll take it to a… Read more »

Laura
Laura
8 years ago

My husband and I often comment on the $400 for $80 dress syndrome by saying that it’s an $80 dress (what a reasonable price for it would have been if they hadn’t jacked the price so they could sell it at X% off) to begin with so it isn’t really a deal. Just what the price should have been all along. So, we aren’t saving a penny, making those “deals” really easy to walk away from.

Cody
Cody
8 years ago

There is a really good, detailed write-up on this over at You Are Not So Smart.

http://youarenotsosmart.com/2010/07/27/anchoring-effect/

Paul Walker
Paul Walker
8 years ago

Hi

Just to second the Dan Ariely recommendation. “Predictably Irrational” is really interesting; he’s done several TED talks as well if you want to try it out for free. 😉

Paul

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