Dropping Anchor, and Judging Value Imperfectly

Anchor Graveyard - Portugal (Photo: Travel-in-Portugal.com)

I like to think I'm a sophisticated value hunter. I trend prices over time, I use page monitors to track changes on websites for stock and pricing adjustments, I search all corners of the web and the world looking for the absolute best buy for my money. When it comes to judging value, I also try to use a relatively discrete set of criteria to help me pin down what I think an item is really worth to me. I would wager that's more than 99% of the population cares to do, but there are still some ways merchandisers affect how you or I often perceive something should be priced, whether we are aware of it or not. One of the simplest and most powerful of these is anchoring.

Anchoring is a form of cognitive bias that occurs when an initial value (the "anchor") influences subsequent estimations towards it. For instance, the stereotypical used car salesman may set a price very high initially - this is the anchor. The perception of fair value in the eyes of the customer then relies in part on the anchor, and what is seen as a good price or good deal is relative to that initial price, even if it is still higher than the average price paid for that car.

In the clothing industry, the initial list price or manufacturer's suggested retail price sets an anchor on what you decide an item's worth to ultimately be, and by setting a higher number our minds naturally have a tendency to choose an acceptable price closer to that number. It doesn't correct the bias knowing that this is the case, either. In a number of experiments, anchoring still had an effect when subjects were told that anchoring would affect them as well as when a monetary incentive was introduced.

Anchoring has been shown to have a significant effect even when the numbers are obviously unrealistic. In one study, people were asked to estimate if Gandhi died before or after age 9, and before or after age 140. Both of those numbers are obviously way too high/low, but subjects who were given 9 as their anchor guessed a significantly lower number than the 140 group (average 50 years old vs. 67). Even when numbers were seemingly spun on a wheel at "random" (though secretly preset to always land on either 10 or 65), a different experiment asking subjects to guess how many African countries were in the United Nations found that people would tend to estimate closer to the initial anchor - 25% for those that saw the number 10 vs. 45% for those that saw 65 (the real answer is 54, just FYI, in case it was eating you up like it was me). The initial reference point still influenced decisions even when it was perceived to be completely meaningless.

I would have also guessed that the more experience with a subject, the less one would tend to be influenced by anchoring. Interestingly enough, however, there was yet another study looking at the anchoring effect when estimating real estate prices using a group of students and a group of real estate agents, and despite the experience of the real estate agents with the subject matter they were still easily influenced by the anchor - even though they thought they were not. Sure, real estate has a large amount of subjective qualities that factor into price estimations, but so does the clothing.

A ridiculous anchor, courtesy of Invicta

I've been struggling with how to deal with this with my own purchases. I think it's important first to accept the fact that our brains are wired to work this way rather than take on the attitude that "this could never affect me - I'm too smart." We are all special snowflakes or whatever, but we're all human. I use a fairly set list of criteria to help me gauge what something is worth to me, but those factors often include the objectification of some very subjective things like design aesthetic/design exclusivity and the quality of materials and construction. I also try and have a general picture of what objective things I look for at different tiers of pricing, comparing across brands and the market as a whole - stitch density in garment construction, synthetic composition in fabrics, etc. - there is a limit on how much an anchor could sway me to pay for a pair of boots with cemented soles, for example, or literally any price for this watch pictured.

Likely there will always have to be some amount of voodoo in how we come up with what we are willing to pay for things, but most people never stop to think twice about it. I've run across countless comments from people asking why they should buy ______ when it's "not even on sale," which is the most primitive caveman way of thinking about value. Please don't be that guy.

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**Speaking of sales, I've finally bought a couple pairs of chinos and shorts from Jomers, an up-and-coming company that does not run traditional sales at all. Look for thoughts and impressions on that and more direct clothing content in the coming days. As of late, I've been traveling a good amount, working on the flip side, and suffering through Batman vs. Superman twice (not by choice).