We were not the first to observe the effects of anchors, but our experiment was the first demonstration of its absurdity: people’s judgments were influenced by an obviously uninformative number.
We continue with the second part of this article dedicated to psychological anchors and behavioral finance. We remember you that this entry has been written in collaboration with Steering Bird, online advisers in business administration and management, and Tu Mejor Tú, metas claras para el éxito.
In the first part, we talked about anchors and their relationship with finance and markets. We end the article by stating that there are two types of psychological anchors: quantitative and qualitative. Now we are going to focus on quantitative anchors.
When you must come up with an estimate, and you are unsure what to say, you take whatever number is before you.
Let’s start with something that Robert Shiller indicates us in Irrational Exuberance (2000), it’s the fact that if you have ever answered a survey, your answer probably has been influenced by the survey itself. When preparing a survey, one thing that is done is to prevent the respondent from making calculations; and another is to offer some scale to respond quickly. This is how, for example, data range scales work when they ask you about your monthly income or expenses.
Why does this happen? Because in ambiguous situations, our decisions will be affected by whatever psychological anchor is available. If there is little time to respond or act, this is more apparent. For example, if we have to make a numerical estimate, we will tend to use the first number that comes to mind, even if the answer is incorrect. As Robert Shiller indicates in Irrational Exuberance (2000): “When you must come up with an estimate, and you are unsure what to say, you take whatever number is before you”
This trend was demonstrated by psychologists Daniel Kahneman and Amos Tversky, who published the study “Judgment under uncertainty” (Science magazine No. 185, 1974), which points out several interesting things. This study would be one of those that would earn Kahneman the 2002 Nobel Prize in economics, six years after Tversky‘s death (Nobel prizes are not awarded posthumously).
Wheel of fortune
Whenever there is a simple error that most laymen fall for, there is always a slightly more sophisticated version of the same problem that experts fall for.
Kahneman and Tversky conducted an experiment with a wheel of fortune – similar to the one used in television shows – that was inscribed with the numbers 1 through 100 and that had been designed to stop at the numbers 10 or 65. They summoned a group of students, who were asked to spin the wheel and write down the number they had obtained. Then they were asked two questions:
- Is the percentage of African nations among UN members larger or smaller than the number you just wrote?
- What is your best guess of the percentage of African nations in the UN?
Psychologists found that the number indicated by the wheel influenced responses. For example, when the wheel stopped at 10, the percentage of African nations was 25; and when the wheel stopped at 65, the average response was 45.
Khaneman indicates in his book “Thinking, Fast and Slow” (2011) that “The spin of a wheel of fortune—even one that is not rigged—cannot possibly yield useful information about anything, and the participants in our experiment should simply have ignored it”
Also, Khaneman (2011) points out that together with Tversky “We were not the first to observe the effects of anchors, but our experiment was the first demonstration of its absurdity: people’s judgments were influenced by an obviously uninformative number. There was no way to describe the anchoring effect of a wheel of fortune as reasonable”
How much would you pay for a bottle of wine?
A glass of wine will taste better after reading a positive review of it.
Dan Ariely, professor of psychology and behavioral economics at Duke University, published the curious results of one of his experiments in the book “Predictably Irrational” (2008).
Let’s start with a question for the reader. Do you believe that thinking of an arbitrary number can influence how much you are willing to pay for a bottle of wine?
Ariely’s experiment began by asking students to enter the last two digits of their Social Security number. They were then asked if they would be willing to pay that amount for a bottle of wine, among other items. The results were surprising, as they revealed that students with Social Security numbers ending in the highest digits (80-99) were willing to pay more for items (wine, chocolates, etc.) than students with the lowest numbers (01-20) were willing to pay.
About this idea, Kahneman tells us in “Thinking, Fast and Slow” (2011) that there are measurable magnitudes in the effects of psychological anchors. In the case of the experiments carried out using the last two digits of Social Security as an anchor (for example, to estimate the number of doctors in the city), the same effect size is observed in the responses, regardless of the question. Kahneman expresses that “the conclusion is clear: anchors do not have their effects because people believe they are informative” (2011).
Quantitative Anchors, Synthesis
It is a mistake to suppose that the whole issue is how to free man. The issue is to improve the way in which he is controlled.
Burrhus Frederic Skinner
So far, we have only shown you two well-known experiments associated with how we are anchored to quantitative values, that is, to different numbers. With this we want to understand how vulnerable we are to some external stimuli.
Let’s think about how easy it is to give in to quantitative anchors. Remember the questions we asked you at the beginning of the first part of this article. Will your answer be different now? It may depend again on the numbers ahead of you.
Now that you know about the existence of quantitative anchors, we invite you to stay aware of them and take a few minutes to think before acting. We propose a couple of simple exercises:
- Think before buying the 3×2 kind of promotion in retail.
- Notice that the price of EUR 9.99 is closer to EUR 10 than it is to EUR 9
Along with the psychological anchors, there are other conditioning factors of our behavior. There is the optical illusion, the cognitive illusion, the priming, the association of ideas, etc. However, there is an issue that we consider to be even more relevant and it has to do with how we react to the anchors, from the point of view of our emotions and instincts, as well as how we tend to adapt the anchor to the response we deliver.
We are Steering Bird, online advisers in direction, management and finance. We specialize in business analysis, control and analysis of investment projects, results analysis, processes of budget and forecast, etc.