Are your decisions guided by psychological anchors? (part 3)
Anchor Adjustments

The psychological mechanisms that produce anchoring make us far more suggestible than most of us would want to be. And of course there are quite a few people who are willing and able to exploit our gullibility.
Daniel Kahneman

We continue with the third and final part of this article dedicated to psychological anchors. We remember you that this entry has been written in collaboration with Steering Bird advisers in business direction and management, and Tu Mejor Tú, metas claras para el éxito.

In the first part, we talked about psychological anchors and their relationship to finance and markets. In the second part we referred to quantitative anchors. Now we finish with the qualitative or moral anchors and with the anchor adjustment mechanisms.

Qualitative or Moral Anchors

It is in the nature of the human being to seek a justification for his actions.
Aleksandr Solzhenitsyn

There is a psychological principle that indicates that much of the thought that is transformed into action is not quantitative, but takes the form of narration and justification.

In qualitative or moral anchors, we have people acquiring some story without any quantitative dimension, but attractive enough to make a decision. This is because we like stories, we like rumors and spreading them. We are narrative in nature. We like to justify our actions to others, even when it is self-justification (and no one asks us for any explanation) and we are moved by emotions as diverse as love, desire, greed or guilt. Also, we like stories with some coherence of cause and effect.

Justifying with narrative

Everyone is necessarily the hero of his own life story.
John Barth

Let’s start by reviewing the effects of moral anchors on something different than markets. Have you ever wondered How does a jury reason before making a decision in a complicated case? The logical thing is to think that based on the weight of the evidence provided by both the defense and the prosecution. However, the jury is a heterogeneous group of people, who are subjected to one of the most stressful activity.

In 1993, psychologists Nancy Pennington and Reid Hastie published a study in the journal Cognition, called “Reasoning in Explanation-Based Decision Making”. There they discovered that jurors tended to construct narratives to understand the most complex parts of the process, using the details provided to them – both the defense and the prosecution – in order to generate a coherent account of the events. At the time of delivering the verdict, they gave a chronological narrative of the case instead of talking about quantities or probabilities. Thus, only a story justified their decision, which for them was coherent and well-constructed.

Narrative Thinking

We humans seem to be extremely good at generating ideas, theories, and explanations that have the ring of plausibility. We may be relatively deficient, however, in evaluating and testing our ideas once they are formed.
Thomas Gilovich

Have you ever visited a Casino and gambled? Probably yes. This is because people have a strange interest in gambling. This same interest occurs in speculative markets. The propensity to gamble favors financial volatility, because of the emphasis is placed on the potential good luck of the players. Advertising supports this behavior, showing the bias of good luck and not the option of losing everything. Robert Shiller indicates in “Irrational Exuberance” (2000) that in the state of Connecticut, USA, horse racing betting was advertised under the slogan of “Like the stock market, only faster”.

As you can already understand, part of the attention that gambling generates is based on our narrative thinking. When gamblers speak, be they casual or compulsive, they are referring to stories rather than probabilities. This coherent and self-justifying narration inhibits the part of our mind that should tell us that the chances of winning are practically zero. Even when the bettor recognizes that “the house always wins”, he or she tends to want to win at the house.

In this regard, Robert Shiller indicates in “Irrational Exuberance” (2000) that “gamblers use a different vocabulary than do probability theorists, preferring the words luck or lucky day, and rarely uttering the words probability or likelihood. There are stories of their winnings and losses, of the chains of events that preceded their best or worst luck, of the strength of their intuition that yielded good bets.

In this regard, the psychologist Thomas Gilovich indicates in “How We Know What Isn’t So: The Fallibility of Human Reason in Everyday Life” (1993): “We humans seem to be extremely good at generating ideas, theories, and explanations that have the ring of plausibility. We may be relatively deficient, however, in evaluating and testing our ideas once they are formed”

We return to the same observation from the previous section: the construction of a coherent story justifies the actions over the existing quantitative information.

Psychological anchors and the markets

People also appear to want to construct simple reasons for their decisions, as if they feel the need to justify those decisions in simple terms—if not to others, then to themselves.
Robert Shiller

In the same way that gamblers talk about their stories of winnings and losses, those who sell shares to the public tend to tell some story of the share, generating a coherent narrative, which includes the history of the company, the products, the social and environmental responsibility, and a long etc. Elements such as quantities, probabilities, whether the price is correct, or data on the health of the company’s financial statements are almost never incorporated into the account. Quantitative factors are not part of the story.

Robert Shiller (2000) points out “People also appear to want to construct simple reasons for their decisions, as if they feel the need to justify those decisions in simple terms—if not to others, then to themselves. The need to have a simple reason to explain a decision is similar to the need to have a story behind a decision; both the stories and the reasons are simple rationales that can be conveyed verbally to others”

Psychological anchors and real estate

At issue here is just how malleable decision pro- cesses might be, and whether there is some reality constraint on the ex- tent to which such processes can be influenced.
Gregory Northcraft & Margaret Neale

As you can imagine, Real Estate is also affected by anchor effects. Daniel Kahneman in “Thinking, Fast and Slow” (2011) points to an experiment carried out in 1987 by Gregory Northcraft and Margaret Neale, published in the study “Experts, Amateurs and Real Estate: An Anchoing-and-Adjustment Perspective on Property Pricing Decisions”.

In this experiment, real estate agents were asked to appraise a house for sale. Agents visited the home and reviewed a property information brochure, which included a sale price. Half of the agents were shown an excessively high price and the other half, one that was too low. Real estate agents gave their opinion on the reasonable purchase price and the lowest price they would be willing to accept as sellers.

All they gave answers anchored to the price indicated in the brochure, even though they explicitly indicated that they had ignored that number. The same experiment was done on students, with similar results. Kahneman (2011) indicates “the only difference between the two groups was that the students conceded that they were influenced by the anchor, while the professionals denied that influence”.

Anchor Adjustments

This adjustment process requires awareness that one’s own perspective is potentially unique, effortful cognition to deliberately correct an intuitive assessment, and time to render a deliberate judgment.
Nicholas Epley

So far, we have seen how easy it is to anchor ourselves to the first number that comes to mind. We have also seen that we tend to justify ourselves with a story instead of quantitative values, which would be anchoring ourselves to ideas. However, our answer is not exactly the anchor to which we are subjected, but it varies a bit. This is a product of the anchor adjustments.

Daniel Kahneman indicates in “Thinking, Fast and Slow” (2011) that Amos Tversky “liked the idea of an adjust-and-anchor heuristic as a strategy for estimating uncertain quantities: start from an anchoring number, assess whether it is too high or too low, and gradually adjust your estimate by mentally “moving” from the anchor”. The process stops at any moment, when we are simply not sure whether to continue adjusting the estimate.

On the other hand, psychologists Nicholas Epley and Thomas Gilovich continued to study anchor adjustments and found that it is an intentional attempt to deviate from the anchor, adding that people adjust less when they are mentally tired.

Epley notes that “because adjustment processes tend to terminate as soon as one reaches a plausible value, estimates tend to be biased on the side of the range consistent with the initial anchor, thereby yielding an egocentric bias” (Epley, N., & Eyal, T., 2019. Through a looking glass, darkly: Using mechanisms of mind perception to identify accuracy, overconfidence, and under appreciated means for improvement. Advances in Experimental Social Psychology)

Kahneman (2011) also points out that there is a priming effect on anchors, since our mind “understands sentences by trying to make them true, and the selective activation of compatible thoughts produces a family of systematic errors that make us gullible and prone to believe too strongly whatever we believe”.

Synthesis. Psychological anchors

For desired conclusions, we ask ourselves, “Can I believe this?”, but for unpalatable conclusions we ask, “Must I believe this?”
Thomas Gilovich

In synthesis, we must recognize the existence of psychological anchors and their great power over our decisions or responses, especially when we have little time to act. We have wanted to talk about quantitative or numerical anchors and qualitative or moral anchors, to refer to the fact that we are influenced by both random numbers and ideas.

Even still anchored to a number, we are capable of constructing a story that seems coherent to us, to justify our action, response or decision. This is because we lean more to “the story of” than to probabilities.

However, once we have anchored, we try to adjust our response, which involves a mental process that stops at any moment. The final answer will be as wrong as the original anchor.

We cannot avoid psychological anchors, but we can learn not to be innocent victims of them.

  • Advertising will lead you to an anchor on many occasions.
  • The purchase of a home will be anchored by the first offer.
  • We see the same effect in the sale of a product in a pawn shop.
  • In an auction, the dynamics is given by the starting price plus the range of increase in prices.
  • A negotiation is a process of anchoring adjustment on the first values that are put on the table.

We can continue with examples about stock purchases, about the price of the latest iPhone, about your company’s budgets, the level of the stock market or the economy of a country. We will always find an anchor.

Finally, and regarding what we have told you about the psychological anchors, we invite you to activate your thinking and be aware of this.

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.

Contact us if you need help. We invite you to learn about our services and read our articles.

This article has been written in conjunction with the team of Tu Mejor Tú, Metas claras para el éxito. We invite you to visit their website, know their services, articles and to contact them if you need their help.

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