Anchoring; how it impacts on our spending behaviour

At some time or other we have all been anchored.  This tends to happen more often when we are purchasing a product or service that we don’t know too much about.  Here’s how it works.

tyre croppedI was happily driving my car when it developed a bit of a shudder through the steering wheel.  I didn’t think it was a major so I took it to my local Tyre shop, thinking my wheels just needed balancing. (That is about the extent of my technical knowledge of tyres).  I left my car in the serviceman’s capable hands and headed off to my appointment.

Within 10 minutes my phone rang – never a good sign.  It was the tyre shop, the problem was somewhat more serious than balancing.  I needed a new tyre as this one was falling apart (apparently I was lucky I made it to the tyre shop without having a serious accident).  Not only did I need one new tyre, the others were looking quite worn so I really needed to replace all four.  Not what I wanted to hear, but safety comes first so I took a deep breath and asked for some prices.

This is what I was told.

We can get you XYZ brand which is a top of the line tyre for your car and they are $279.00 each.

Or, we can get you ABC brand which is also a good brand and they are $220.00 each, and then of course there are the under $200 imported ones but we really wouldn’t recommend those.

So, here was my dilemma, I didn’t know the difference between XYZ and ABC brand, so after asking a couple more questions I was told that ABC brand was comparable with what I had on the car and were reliable so I chose that option and felt quite happy with my decision as I had ‘saved’ $59.00 per tyre.

What had happened here?  The anchoring effect had kicked in.

I didn’t know a lot about what I was purchasing so when I was told $279.00 for a ‘top of the line tyre’.  I subconsciously attached my decision making to that number.

I was given a second option that was almost as good but at a much lower price, so I selected that option as it sounded like a really good deal.

The anchoring effect is something to use to your advantage when you are the seller.

I told this story to our friend who is an insurance broker, he uses this tactic all the time when talking to clients, he gives them three options; one with all the bells and whistles with a high premium, then a second option almost as good at a lower premium and the third covers the bare minimum, the most common choice is the mid price option.  He knew the system worked but hadn’t realised why.

As a buyer, be aware of anchoring and where ever possible make sure you do your research before committing so you are setting your own anchor.

Behavioural Economics has lots of examples of the anchoring effect and how it works, it is quite fascinating how our brains attach to information that in some cases have no relevance to our decisions.

On top of anchoring, is something called the confirmation bias……. more on that in an upcoming article.

If you would like some more information about anchoring, or a question you would like us to answer, please contact us, we are happy to help.

Lynda Moore   http://www.mymoneyseeker.com

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One thought on “Anchoring; how it impacts on our spending behaviour

  1. This could of course also be a really good strategy if you are telling your partner why you want to buy something for yourself. Why I need the new Smartphone, camera, eBook Reader, laptop etc.

    Of course in this instance, all the statements were probably true. The other element was that you pretty much had to buy something from this vendor once you were there and you knew it wasn’t safe to drive away. There is of course always the spare, but you might not think of this at the time.

    As you say, this is very good knowledge to be forearmed with and many people will be surprised how often it is used on them, especially in retail with higher ticket items like beds and consumer electronics. Now that you know about the strategy, how do you make sure that you are in control of the purchase decision?

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