Anchoring and Adjustment1

The anchoring and adjustment heuristic was discovered by Tversky and Kahneman. This heuristic is used to make a numerical estimate of an unknown quantity. We begin by retrieving the most relevant number that we know. This number serves as the anchor. Then that anchor is adjusted upwards or downwards based on what other factors we know or what other information that becomes accessible. Tversky and Kahneman demonstrated this heuristic in the following experiment. One group of subjects watched a spinning wheel (that was rigged to stop at 65) and then asked them whether the number of African nations that were members of the United Nations was higher or lower than this number (65). Then they were asked to estimate the number of African nations that were members of the United Nations. A second group of subjects was administered the same procedure except that the spinning wheel was rigged to stop at 10. The mean estimate of the first group (where the spinning wheel stopped at 65) was 45. The mean estimate of the second group (where the spinning wheel stopped at 10) was 25. Clearly the spinning wheel provided an anchor that was used to make the estimate.

The results of this experiment might not impress you as you might think that most students would be completely clueless as to the number of African nations that belonged to the United Nations. Consequently, they were desperate and where grasping (anchoring) at straws. Perhaps a more practical demonstration of the relevance of the anchoring and adjustment heuristic can be found in the bargaining process when purchasing an automobile. The salesperson uses the Manufacturer’s Suggested Retail Price (MSRP) as the anchor, and bargain down from there. The customer is advised to find the invoice price, the price that the dealer actually paid for the car, and use that as the anchor and bargain up from there.

Anchoring effects can produce reasoning results that are ridiculous. Paul Slovic and his colleagues report a study in which people rated a gamble with a 7/36 chance to win $9.00 and a 29/37 chance to lose $0.05 more favorable than a gamble with a 7/36 chance to win $9.00 and a 29/37 chance to lose nothing! For both bets the amount won and the odds are identical, but in the preferred choice there is a possible loss, albeit a small loss. This bet remained preferred to the no loss bet when the odds and the payout remained the same, but the possible loss was increased to $.25. The only apparent explanation here is the $.05 and $.25 loss conditions provided a reference point that made the $9.00 winnings appear larger than when the bet did not contain a reference point (no loss).

1Most of this content is based upon Stanovich, K. E. (2009). What Intelligence Tests Miss: the psychology of rational thought. New Haven: The Yale University Press.

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