The hidden factor that influences how we spend,
In Mind Over Money, Claudia Hammond writes about the psychology of our relationship with money. In this excerpt she explores the concept of ‘anchoring.’ A suggested price, even if unrelated to a purchase, can have a big impact on what a customer is willin
When you get your credit card bill, do you pay it all off every month, pay the maximum you think you can afford, pay the minimum required, or something in between?
One option you don’t have — if you live in the U.S. or Britain anyway — is to pay nothing at all. There’s a reason for that. In these two countries, credit cards are used more than anywhere else in the world, and authorities — who were concerned that too many people were racking up huge debt — enforced regulations requiring credit card companies to print a compulsory minimum payment on the monthly bill.
At first sight, it seems like a good idea. People are forced to confront their debt and to pay at least some of the balance off each month. Yet research by Prof. Neil Stewart from the University of Warwick has found that the minimum payment could have an unintended effect. What he and his team discovered was that when people are faced with the compulsory minimum payment, which is not particularly high of course, it leads them to pay off less of the debt than they might have done otherwise. And another team found that if an optional higher repayment was suggested, people tended to pay off more than they would otherwise.
This is due to a well-established psychological effect called “anchoring.” It works like this. A price is suggested to you, and you think, “Why not use that as a guide, a hint as to a fair price, but then adjust the figure according to your own assessment of the right value?” It sounds like a sensible place to start, particularly if you have little or no real idea of what something should cost. The problem is that first figure can be far more influential than we think. And of course it can be inflated — or set artificially low.
If you’re buying a house, for example, the asking price gives an anchor and your assessment of what the house is really worth moves in relation to that. (Incidentally, this is why, when you get your home val- ued, you should never tell the estate agent what other valuations you’ve had. It’ll lodge a price in their mind and they won’t be able to give a truly independent assessment.) Some of the mistakes we make about money are easy to avoid once we know how to recognize them. With anchoring, though, it might not be so easy. Anchoring has such a robust effect that, even when people are warned about it, they don’t always change their behaviour.
With house prices or credit card payments, the numbers initially confronting you are at least related to some financial logic such as the market rate. But anchoring can influence our notions of price in more extraordinary ways.
For a start, consider this, well, priceless example. A study showed that people were prepared to pay more for a meal from a restaurant called Studio 97 than one called Studio 19, the sole reason being that 97 was the anchoring number in the first case, and 19 in the second! The delightful lesson here for aspiring restaurant owners is that you should seriously consider calling your place the Trillion Pound Café. You’ll make a fortune. But never, ever go for the Zero Dollar Diner.
Another example I like is that when people were asked to draw lines of certain lengths on a piece of paper, and then asked to estimate the average temperature in Honolulu in July, those asked to draw longer lines gave higher temperatures.
Anchors have a crazy amount of power. Whichever way people are presented with an initial number, or even encouraged to generate their own — be it their phone number, the figure on an athlete’s vest, a number on a roulette wheel — that number makes a difference to their estimates of everything from the weight of the Roman emperor Julius Caesar, to the freezing point of vodka, to the year the telephone was invented.
The numbers don’t even have to represent the same types of measure; a weight expressed in kilograms can influence the price you’re prepared to pay in dollars. It seems people can’t help but have their thinking skewed by anchor numbers.
Here is a pair of questions from one of the classic studies:
Was Gandhi more or less than 140 when he died? How old was he when he died? And here’s another pair: Was Gandhi more than 9 years old when he died? How old was he when he died? Obviously the first question is nonsense, since nobody has ever lived to the age of 140, but when people are asked that question first, the average answer they give to the second question is 67. If instead they are first asked whether Gandhi was older than 9 when he died (another nonsense question for anyone who’s even vaguely heard of the Mahatma), their average answer for his age at death is brought down to 50. (If you’re wondering, Gandhi was in fact 78 when he was assassinated.)
Now, picture this scene: a boardwalk on the West Coast of the United States. Among the stalls of aromatherapists, psychics, crystal sellers and head masseurs are two tables, side by side, one apparently selling CDs, the other sweatshirts. It’s a laidback, chilled-out Californian scene. But what people out on the boardwalk didn’t know was that some seriously heavy science was going down that day. Because these stalls were staffed by undercover researchers studying the impact of what’s known as incidental pricing.
In keeping with the Californian vibe, passersby who showed an interest in the CDs were given the chance to name their price. True, a device was used to ensure that people didn’t just go for stupidly low figures, but rather worked out what they were really prepared to pay. Still, if the price was reasonable, the CD was theirs.
Meanwhile, next door, the sweatshirt stand was sometimes displaying a sign saying the sweatshirts cost $10, while at other times the advertised price increased to a whopping $80. Now, the cost of the sweatshirts should have been irrelevant to people considering the CDs. Yet even so, the average price people were prepared to pay for the CD when sweatshirts were advertised at $10 was $7.29, but that rose to $9 when the sweatshirt price was $80.28 Afterwards, every single customer insisted that the price of the sweatshirt had not swayed them. But how else can the difference be explained?
Unlike some hypothetical studies, this research had the advantage of using real customers. But still, it was clearly a somewhat artificial situation. This led the same researchers to analyze five years’ worth of real-life sales at the annual Classic Car auction in the States. Collectors come from around the world to this auction. They can inspect each car. They have precise ideas about what they’re looking for, and there are plenty of guides in which they can look up typical prices. These are people who should be making informed bids.
Even so, the researchers found that if a cheaper model of car was sold immediately after a high-end model had been sold, the final sale price went up. So, in the case of a Plymouth Barracuda, when it was sold after a classic Mercedes, the price rose by an astonishing 45 per cent compared with the average sale price.
An even more serious, indeed alarming, example of how anchoring can impact on people’s thinking happened in a German study. A group of junior lawyers who had begun to judge cases in court were given the details of a case in which a woman had been caught shoplifting. They were then asked to roll a pair of dice, which had been loaded to give a total of either three or nine every time. Next, they were asked whether they would recommend a prison sentence of more or less than the number of months shown on the dice. Finally, they had to state the exact prison sentence they would give.
Those lawyers who had seen a score of nine on the dice gave the woman an average sentence of eight months, but those whose dice had shown the number three gave her just five months. It was of course a hypothetical situation again, and hopefully in real life judges aren’t rolling dice immediately before making sentencing decisions. But the lawyers in the experiment were well aware that the numbers on the dice were totally irrelevant, and yet they were still swayed by them.