Anchoring

Anchoring or focalism is a cognitive bias that describes the common human tendency to rely too heavily, or "anchor," on one trait or piece of information when making decisions.

Background

During normal decision making, anchoring occurs when individuals overly rely on a specific piece of information to govern their thought-process. Once the anchor is set, there is a bias toward adjusting or interpreting other information to reflect the "anchored" information. Through this cognitive bias, the first information learned about a subject (or, more generally, information learned at an early age) can affect future decision making and information analysis.

For example, as a person looks to buy a used car, he or she may focus excessively on the odometer reading and model year of the car, and use those criteria as a basis for evaluating the value of the car, rather than considering how well the engine or the transmission is maintained.

Focusing effect

The focusing effect (or focusing illusion) is a cognitive bias that occurs when people place too much importance on one aspect of an event, causing an error in accurately predicting the utility of a future outcome.

People focus on notable differences, excluding those that are less conspicuous, when making predictions about happiness or convenience. For example, when people were asked how much happier they believe Californians are compared to Midwesterners, Californians and Midwesterners both said Californians must be considerably happier, when, in fact, there was no difference between the actual happiness rating of Californians and Midwesterners. The bias lies in that most people asked focused on and overweighed the sunny weather and ostensibly easy-going lifestyle of California and devalued and underrated other aspects of life and determinants of happiness, such as low crime rates and safety from natural disasters like earthquakes (both of which large parts of California lack).^[1]

A rise in income has only a small and transient effect on happiness and well-being, but people consistently overestimate this effect. Kahneman et al. proposed that this is a result of a focusing illusion, with people focusing on conventional measures of achievement rather than on everyday routine.^[2]

Anchoring and adjustment heuristic

Anchoring and adjustment is a psychological heuristic that influences the way people intuitively assess probabilities. According to this heuristic, people start with an implicitly suggested reference point (the "anchor") and make adjustments to it to reach their estimate. A person begins with a first approximation (anchor) and then makes incremental adjustments based on additional information.

Daniel Kahneman

The anchoring and adjustment heuristic was first theorized by Amos Tversky and Daniel Kahneman. In one of their first studies, the two showed that when asked to guess the percentage of African nations that are members of the United Nations, people who were first asked "Was it more or less than 10%?" guessed lower values (25% on average) than those who had been asked if it was more or less than 65% (45% on average).^[3] The pattern has held in other experiments for a wide variety of different subjects of estimation.

As a second example, in a study by Dan Ariely, an audience is first asked to write the last two digits of their social security number and consider whether they would pay this number of dollars for items whose value they did not know, such as wine, chocolate and computer equipment. They were then asked to bid for these items, with the result that the audience members with higher two-digit numbers would submit bids that were between 60 percent and 120 percent higher than those with the lower social security numbers, which had become their anchor.^[4]

References

1. ^ Schkade, D.A., & Kahneman, D. (1998). "Does living in California make people happy? A focusing illusion in judgments of life satisfaction". Psychological Science, 9, 340–346.
2. ^ Kahneman, Daniel; Alan B. Krueger, David Schkade, Norbert Schwarz, Arthur A. Stone (2006-06-30). "Would you be happier if you were richer? A focusing illusion". Science 312 (5782): 1908–10. doi:10.1126/science.1129688. PMID 16809528. http://www.morgenkommichspaeterrein.de/ressources/download/125krueger.pdf. 
3. ^ Tversky, A. & Kahneman, D. (1974). "Judgment under uncertainty: Heuristics and biases". Science, 185, 1124–1130.
4. ^ Edward Teach, "Avoiding Decision Traps", CFO (1 June 2004). Retrieved 29 May 2007.

• Del Missier, F., Ferrante, D., & Costantini, E. (2007). "Focusing effects in predecisional information acquisition". Acta Psychologica, 125, 155–174.

External links

• Anchor pricing