In this episode, we’re going to drill down and understand a specific cognitive bias to help you start building a mental toolkit. Remember that concept we talked about in the interviews with Shane Parish of Farnham Street, and the author and global financial strategist Michael Knobison [?] Both of them are experts in human thinking and decision making, and they both shared the same concept, the same idea. That what we should focus on to become smarter, to build better minds and make better decisions it to build a toolkit of mental models. Of models of reality that we can use to understand ourselves, understand our thinking, and understand the world around us. If you want to dig around more in that concept, check out those two interviews. They’re great interviews - tons of great information in there. But today we’re going to focus on a specific mental model. A specific cognitive bias. The anchoring bias.
Along with priming and framing, which we’ve covered in previous episodes. These are all ways in which the environment can substantially shape your decision making at a subconscious level. It’s a cognitive bias that you want to be aware of to know, to understand, so that you can add it to your mental toolbox so that you can make better decisions and so that you don’t fall prey, like so many people do, to these dangerous cognitive biases.
I wanted to open up with a quote from the book Thinking Fast and Slow by Daniel Kahneman. We’ve cited this in a number of other episodes, it’s an amazing book, highly recommend getting into it. But, before you do, there’s other, better books to start with because it’s such a dense book. Amazing information in there. But we talked about in the priming episode some other books that are better to start with if you really want to kind of begin to get a grasp of psychology and how it controls and rules the world around us. Anyway, here’s the quote.
QUOTE: “The phenomenon we were studying is so common and so important in the everyday world that you should know its name. It is an anchoring effect. It occurs when people consider a particular value from an unknown quality, before estimating that quantity. What happens is one of the most reliable and robust results of experimental psychology. The estimates stay close to the number that people considered, hence the image of an anchor. If you were asked whether Ghandi was more than 114 years old when he died, you will end up with a much higher estimate of is age at death than you would if the anchoring question referred to his death at age 35.” End quote.
Let’s dig into that a little bit.
Anchoring is the phenomenon where totally random or arbitrary numbers can substantially impact our decision making. Can substantially change the values that we assign to things, and the numbers that we select. He cites the example of Gandhi. If you - and they conducted this research study. They asked people whether Gandhi was more than 114 years old when he died. They also asked people whether Gandhi was younger than age 35 when he died. If you ask that question, what happens - and you’re probably already doing this yourself. What happens is you take that number, which is called the anchor, and then you start adjusting back from that number to something that is more reasonable. We all know that Gandhi was not 114. We also know that he was older than 35 when he died. But people who start adjusting, and this is the crux of the anchoring bias, typically people will move away from the anchor until they get to a point of uncertainty. Until they get to a point or a place where they’re not sure if they should keep moving the anchor any further. The problem is - that’s where they stop. That’s where they kind of place their guess. But typically they don’t go far enough. So the anchor has a substantial impact on their guess, or on the number, or on the value they associate to this. And we’ll get into some real world implications of this.
To give you another illustration of the anchoring effect. Amos Tversky conducted a study where they had a rigged Wheel of Fortune. It would only ever either go to 10, or 65. Now, it had zero to 100 on there, but it was rigged to only ever stop at one of those two numbers. What they would do is stand in front of a small group of people, ask them to write down the number when the wheel stopped. Again, the number would either be 10 or 65. Then they asked them two specific questions. Is the percentage of African nations among UN members larger or smaller than the number you just wrote. The next question: What is your best guess of the percentage of African nations in the United Nations? Now, as they point out, spinning that Wheel of Fortune has no impact on the number of African nations in the United Nations, it provides no valuable information. But it had a substantial impact on respondents and how they felt and how they thought about the second question that they were asked. Specifically, the average estimate of those who saw the number 10, was the 25% of the United Nations were African Nations. However, those who saw the number 65 estimated that 45% of the United Nations were comprised with African Nations. The key point here is that this totally innocuous, totally random number, created a substantial difference in the way that people perceived and tried to understand this phenomenon. We’re going to look at some other examples of how the anchoring bias can dramatically shape our decisions.
But before we dig into that, I wanted to talk about a couple other features of the anchoring bias. A couple other ways to think about and understand how the anchoring bias functions. There’s a study conducted by Nick Epley and Tom Gilovich that found evidence that when they expose people to an anchor and have them shake their heads, they were less likely to have the anchor influence them. It was almost as if, at a subconscious level, they were rejecting the anchor. So they moved further away from the anchor and made better and more accurate decisions than either people who did nothing, or people who nodded their head in agreement which actually showed an enhance anchoring effect. But the more fascinating finding of the Epley and Gilovich study is that they confirmed that adjusting away from an anchor is an effortful process. It’s something that depletes our mental resources. And we’ve talked about this before. We’ve talked about willpower, we’ve talked about decision fatigue. And we go in-depth in that in our interview with Peter Shallard about success predictors. It’s a great episode if you haven’t listened to it. I would highly recommend listening to that episode because we really talk a lot about replenish willpower, how it works, how decision fatigue functions, and much more. But one of the fascinating things is that conscious adjustments away from an actor take willpower and take decision-making power. So, if we’re in a state of mental fatigue, we’re more likely to be influenced by anchors. They’re more likely to shape our decisions and make us make poor decisions.
The next fascinating thing about the anchoring bias is that it can actually be measured, unlike many psychological phenomenon, the anchoring bias because it deals with numbers, has a measurable effect and can often be quite literally, quantified. As Kahneman puts it, QUOTE: “Many psychological phenomena can be demonstrated experimentally. But few can actually be measured. The effect of anchors is an exception. Anchoring can be measured, and it is an impressively large effect.” End quote. And there’s a really good study demonstrates how they measure the anchoring effect, and it also shows us how even experts can be influenced substantially by anchors, and how anchors can influence us at a subconscious level, even when we’re not aware of them. Even to the point where experts will literally deny that the anchor had any impact on their decision making. And in an experience that was conducted with real estate agents. The agents were given an opportunity to assess the value of a house that was actually on the market. They visited the house and studied comprehensive amount of information that included an asking price. The trick here is that half of the agents saw an asking price that was substantially higher than the list price. The other half saw an asking price that was substantially lower. Each agent was asked to give an opinion about a reasonable buying price for the house, and the lowest possible price they’d be willing to sell the house if they were the owner. What they found out is, and again, anchoring is a measurable effect. Agents who were shown the low price, were 41% lower than the actual price of the house. Agents who had been shown a high price, were 41% higher. Again, this is average. So the average anchoring effect was 41%. The interesting thing is that agents who asked for the list price had any impact on their judgement. The vast majority of them took pride in their ability to ignore the list price and determine the value the home based on other factors.
So, not only was there a substantial anchoring effect for these experts, but they were consciously unaware of the impact that anchoring had on them. They then conducted a follow-up study with business school students where they did the same thing. The fascinating outcome was that business school students also had a 48% anchoring effect. The crazy thing is that the difference between how the anchor affected the experts, influenced their decisions by a 41% margin, versus total laymen who had a 48% difference. Those are pretty close together. The detailed expertise that these agents had was not enough to overcome the anchoring bias. The fact that they said it had no impact on their decision, despite the fact that a group of totally uneducated people about the real estate space specifically had almost the same margin of error as the real estate agents. The only difference between the two studies was that the business school students conceded the fact that the anchor price substantially impacted their decision making.
So, in many ways, expertise was more dangerous in this context because the business school students, knowing they were not experts, were willing to admit that the anchor had influenced their pricing. But the experts themselves were not willing to admit that. And it’s not even that they were trying to hide that fact. They were not consciously aware of the fact that the anchor had influenced them. That’s why anchoring can be so dangerous. It’s something that we’re often not aware of at a conscious level. It’s just like the priming effect. It’s just like the framing effect. These cognitive biases take place subconsciously. We have to try really hard - we have to focus in. We have to understand them deeply. We have to understand our own thinking and be aware of all of them so that we can catch ourselves, and so that we can stop having things like anchoring influence our decision making.
Another fascinating component of the anchoring bias is that totally random anchors can have a substantial impact on people’s perceptions. We talked about that when we talked about the number of African nations in the United Nations. But this is even more staggering. There’s a study about judges sentencing people. And I’m going to quote from Kahneman here, because he perfectly describes this experiment.
QUOTE: “The power of random anchors has been demonstrated in some unsettling ways. German judges with an average of more than 15 years of experience on the bench, first read a description of a women who had been caught shoplifting. Then, rolled a pair of dice that were loaded so every role resulted in either a three, or a nine. As soon as the dice came to a stop, the judges were asked whether they would sentence the woman to a term in prison greater or lesser in months than the exact number showing on the dice. Finally, the judges were instructed to specify the exact prison sentence they would give to the shoplifter. On average, those who rolled a nine said they would sentence her to eight months. Those who rolled a three, said they would sentence her to five months. The anchoring effect was 50%.”
Think about that. Judges with more than 15 years’ experience on average, were influenced by something as trivial as a dice role in determining how long somebody would be sent to prison. There’s a 50% anchoring effect on these highly trained, highly experiences experts. People who we think of as totally unbiased. And we’ve talked before about in a number of the “Weapons of Influence” episodes on the podcast about how other factors can substantially influence judges in their decision making. But it’s really scary sometimes when you think about the fact that our judicial system can be influenced by such random and arbitrary things. But it further underscores the importance of the anchoring effect, and understanding it. And really grasping it so that we can become better decision makers. So that we don’t fall prey to these same mistakes. Because in your life, when you see a random number, it can impact your decision. The date, the time, your social security number. All of these things can change your decision making. Can change the way you value things. Can change the way you make quantitative decisions. So it’s something we have to be very aware of. Something we have to constantly cultivate an awareness of so that we don’t fall prey to this. So that we don’t get trapped. So that we don’t make bad decisions.
Kahneman has a phenomenal quote about the anchoring bias that I think sums this up really nicely. This is from, again, Thinking Fast and Slow.
QUOTE: “The main goal of priming research is that our thoughts and our behavior are influenced much more than we know or want, by the environment of the moment. Many people find the priming results unbelievable because they do not correspond with subjective experience. Many others find the results upsetting. Because they threaten the subjective sense of agency autonomy. If the content of a screensaver on an irrelevant computer can affect your willingness to help strangers without your being aware of it. How free are you? Anchoring effects are threatening in a similar way. You’re always aware of the anchor and even pay attention to it. But you do not know how it guides and constrains your thinking. Because you cannot imagine how you would have thought if the anchor had been different or absent. However, you should assume that any number that is on the table has had an anchoring effect on you, and if the stakes are high you should mobilize your System Two combat the effect.” End quote.
He talks about a couple different things in there. One, he touched on priming, and I think - I wanted to loop priming back into this because if you haven’t listened yet to the priming episode, or the episode about framing. All three of these are environmental effects in ways your environment can massively shape your decision making at a subconscious level, even if you’re totally not aware of it. So, all of these effects are interrelated in many ways. And the ways that you combat them, the way you think about them, are all interrelated. He also mentioned a study that we haven’t talked about where a screensaver impacted people’s willingness to help strangers. That’s a study he talks about - digs into, in Thinking Fast and Slow.
Again, there’s a lot more research behind every single one of these topics. I tried to cherry-pick a few stark and powerful examples for you on the podcast to really drive the point home. But there’s dozens more research studies that share and show all of these findings. The last thing to touch on briefly, is he talks about system two. We’ve touched on this in some of the other episodes, but System One and System Two are two different descriptions for parts of your brain that Kahneman uses in the book, Thinking Fast and Slow. System Two is essentially your sort of willful processing power. Willful conscious attention. If you think about it, System One is how you read, how you process language, how you process images, and have emotional reactions. System Two is how you do things like long division. So, Kahneman digs much more deeply into both of those the book Thinking Fast and Slow, but suffice it to say, for the effects of this quote, mobilize your conscious attention. Become aware of it. That’s how you combat things like the anchoring effect. That’s how you combat things like the priming effect and the framing effect.
All three of these are very very influential phenomenon. Things that you want to be aware of, mental models that you want to have in your mental toolkit. So, whenever you see a number thrown out there, understand that that could be influencing your decision making, especially if you’re making quantitive decisions. This has a ton of implications, whether it’s buying a house, whether it’s in business negotiations, whether you’re talking about the value of something, buying a car. People will try to use the anchoring bias on you all the time in your life. And sometimes it’ll happen by accident, sometimes it’ll happen consciously. But it’s something you want to really press pause, think about, and be aware of.
On the flip-side, you can also harness anchoring to your benefit if you’re presenting something, you want to frame something in a certain way. Remember, the previous episode we talked a ton about how important simple turns of phrase are, in shaping the way that things are framed and shaping people’s emotional reactions and decisions in the way that things are phrased. So if you haven’t yet listened to the framing episode, I highly recommend checking that out. But if you want to influence people’s decision making, get people to make the decisions that you think are the best possible decisions, anchoring can be another tool in that toolbox that can help you shape those decisions in a more proactive and effective way.