This Thinking Error is Costing You a Lot of Money

I’m about to save you a ton of money and make you a better’re welcome. All you have to do is understand how silly we are when it comes to numbers and something called anchoring.

So many of us waste money on products and services even though we think we’re phenomenal bargain hunters. Sometimes, we’re awful at negotiating a pay raise or haggling a price down. By learning about something called anchoring, it’ll completely change the way you look at these situations and many more.

In a study conducted by behavioral economists, they wanted to see if an arbitrary number could sway how much a person was willing to pay for something. Not only that, but they wanted to see if people who should be above average in business would be able to make better decisions, so they did this experiment on MBA students. The researchers wanted to see how much these students would pay for different products like computer accessories, wine bottles, luxury chocolates and books, but there was a catch.

The researchers asked the students if they would pay the dollar amount for each product based on the last two digits of their social security number. So, if the last two digits were 60, would they pay $60 for something like a computer mouse or box of chocolates? Or, if the last two digits were 12, would they pay $12 for a bottle of wine? After the researchers received a “yes” or “no” from the students, they had the students place bids on how much they would pay for each item, and the results aren’t what you would suspect.

Thinking about the last two digits of your social security number should have no effect on how much you would pay for a product, but it does, and it’s all due to anchoring.

In their research, they found that subjects with the highest 20% of social security numbers were willing to pay three times as much for the same product as students with the lowest 20% of social security numbers. For example, those with high social security numbers were willing to pay $26.18 on average for a computer mouse, and the low numbers would pay on average about $8.64.

The researchers most likely got the idea for this experiment from the original behavioral economists Daniel Kahneman and Amos Tversky. In one study, they had participants spin a wheel that had numbers from one to 100. Then, they had the participants estimate the number of African countries represented in the UN. Much like the bidding study, the participant guesses were anchored on the arbitrary number they received when they spun the wheel. Low numbers made them have lower estimates, and high numbers made them have higher estimates.

Marketers, salespeople, and others who want your money are trained to understand the psychological effects of anchoring. So, they’ll do small little tricks like putting an extremely expensive bottle of wine on a list with the bottle of wine they really want you to buy. Since you’re anchored on the super high price, the still-expensive lesser bottle seems like a great deal. This same thing happens when you’re buying a car, a TV, and other items, so keep this in mind. If your budget is $100 for a new TV, and then you see a TV marked down from $200 down to $150, you’re likely to go over your budget just because your anchor has changed.

One way that you can use anchoring to your advantage is during negotiations. When you’re asking for a pay raise, always make the first offer, and always go for higher than what you actually want. By anchoring the employer on a high number, they’ll negotiate down to a number that you’re actually satisfied with. From my personal experience, as long as you don’t ask for a ridiculous amount, this is a great strategy.

So before you make a purchase or a negotiation, consider the anchoring affect. Buy yourself something pretty with the money you saved or money you made, and feel free to thank a behavioral economist for the work they do the next time you encounter one.

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