What Is Anchoring and Adjustment?

What Is Anchoring and Adjustment?

Let me explain anchoring and adjustment to you directly: it's a cognitive phenomenon where you base your initial ideas and responses on one key piece of information, then make adjustments from that starting point. This heuristic means you use a specific target number or value as your anchor, and you gradually adjust it until you reach something acceptable. The issue arises when those adjustments aren't enough, keeping your final judgment too close to the original anchor—especially if that anchor is far from the actual truth.

Key Takeaways

Here's what you need to grasp about anchoring and adjustment: it's a cognitive heuristic where you start with an initial idea and adjust your beliefs from there. Studies show it leads to errors when the starting anchor strays from the real value. You can modify its effects through awareness, incentives, careful thought on various possibilities, expertise, experience, personality, and even mood. Importantly, you can leverage anchoring in sales and price negotiations by setting an initial point that sways the discussion your way.

Understanding Anchoring and Adjustment

Anchoring is a cognitive bias in behavioral finance where you fixate on a target number or value—often the first one you encounter, like an expected price or forecast. Unlike conservatism bias, which ties new info to old without much shift, anchoring happens when you base new decisions squarely on that old anchor. To counter it, give new information a thorough review to see its real impact on your original view, but remember, your own traits as a decision-maker matter just as much as deliberate effort.

The core problem with anchoring and adjustment is that if your initial anchor isn't the true value, all your later tweaks will be biased toward it and away from reality. If the anchor is spot-on, though, there's no issue. Adjustments can get skewed by irrelevant thoughts or connections you draw mistakenly. For example, if I show you a random number and then ask for an estimate on something unrelated, that number might unconsciously anchor your response, even if it's irrelevant. Anchors can come from your own ideas, a model's output, or someone else's suggestion.

Research indicates that while some factors influence anchoring, it's tough to dodge entirely—even if you're aware and trying hard to avoid it. Experiments reveal that warning people about it, urging caution, or offering money to steer clear only reduces the effect, not erases it. Greater experience and skill in a field lessen anchoring there, and higher cognitive ability cuts it overall. Your personality and emotions factor in too: depression boosts anchoring, as do traits like agreeableness, conscientiousness, introversion, and openness.

Anchoring and Adjustment in Business and Finance

In sales, pricing, and wage talks, anchoring and adjustment serve as a potent tool. Research shows that your starting anchor can shape the final outcome more than the negotiation itself, by setting the range for counteroffers. Take a used car salesman: if they pitch a price way above fair value, that high anchor pulls the final deal higher than a fair or low start would. The same applies in hiring—propose an initial salary, and it anchors the back-and-forth toward your preferred range.

In finance, an analyst might anchor on a model's output or forecast. To fight this, examine multiple diverse models or evidence streams. Social psychologist Phillip Tetlock notes that 'foxes'—those drawing from many ideas—forecast better than 'hedgehogs' fixated on few big concepts. By considering various models and forecasts, you make your analysis less prone to anchoring biases.