Learn this trick if you want to save some cash
One of my firms recently gave out bonuses. Instead of a thank you for what amounted to almost a year’s paycheck, I overheard one of our Millennials say, referring to the winner of one of the biggest lotteries in history: “Seriously, some joker just got $560 million, and I worked my tail off all year and didn’t even make a million dollars.”
Now, before you choke on your tongue or complain that your bonus was even smaller (or non-existent), know that this is not a Millennial issue, nor is it a “grass is greener” problem. Rather, it’s a quirk of the brain called anchoring.
Anchors act as dead weight in our brains, and nowhere is that more pronounced than with money. Take a recent study by behavioral economist Dan Ariely, who asked a class of MBA students to write down the last two digits of their Social Security numbers on a piece of paper in front of them. He later held a mock auction where students bid on various items such as a bottle of wine or a cordless mouse.
The results were astounding: Students whose last two Social Security numbers were high bid 346% more than students with low numbers. A seemingly random number made a massive difference in how much people were willing to spend.
If a random number affects our cognitive biases that strongly, you can bet that a relevant number works even better, even if it’s one that a retailer has designed to manipulate you.
Many stores have “suggested retail” prices listed next to the lower actual sales price. But that number is often just a made-up number. In many cases, no one has ever actually paid the suggested retail price. But it gives the brain something to anchor onto. The MSRP (manufacturer’s suggested retail price) says that television is worth $1,500, but it’s going for $1,200, which makes you feel like you’re getting a deal.
Anchoring has a big effect on our everyday lives, and anchors aren’t limited to numbers. If you give your kid a beat-up clunker as her first car, she’ll feel great about it if most of her friends have similar clunkers. But guess what she’ll say about her parents if most of her friends were given new cars?
If your siblings have poor marriages, you’re more likely to feel better about your own marriage. Choosing a more affordable neighborhood, with neighbors who are worse off, makes us feel better about ourselves than being the poorest household in an expensive neighborhood. Living below your means in general tends to make people happier than spending more on things that would in theory make someone happier. All of these circumstances set our anchors low and thus makes us feel superior against the anchors in our lives.
If you run a business, it’s easy to use anchoring to your advantage. Simply offer a higher-priced item next to the item you’re really focused on selling. Or offer a tiered system and put the product or service that makes you the most money in the middle — the brain will assume the middle item is superior in price to the highest and superior in features to the lowest. Brain science for business, 101.
Go online and you will be stunned how many companies give you exactly three choices. Ironically, the executives behind the decision often themselves don’t understand why this works — they just see the higher sales and think three choices are best.
As a shopper, your mind puts you at a disadvantage in this regard, so you should practice spotting anchors. Now that you know what they are, you’ll start seeing them everywhere.
There are also a few ways to avoid falling prey to them. First, make sure that whatever comparison item you are presented is a real option you would consider. If not, don’t allow the price to fool you. If you are online, price shop across sites, not just within the same retailer. And if you are in a store, check prices online on your phone.
And here is a great trick the next time you are wondering whether to buy something: Look at your bank statement first.
The latest statistics show that the average household has negative savings, so no better place to anchor before shopping than in your savings account. Anchoring in this way will have the same mental effect as stuffing your face full of food just before going grocery shopping.