In this edition of Life-Changing Concepts:

The Anchoring Effect

Before the 19th century, diamonds were scarce.

Even the richest families struggled to get them.

But when South African miners discovered enormous reserves in the mid-1800s, everything changed.

Suddenly there were enough diamonds for everyone.

This supply increase created a unique problem for the diamond cartel De Beers.

If they reduced the price and made it accessible, diamonds would become a cheap commodity like silver.

And if they kept the prices high, they wouldn’t make any money from the excessive supply.

So they found a creative solution with marketing.

Their advertisers created a campaign to associate diamond rings with love and commitment. Movies and newspapers started romanticizing engagement proposals on one knee with a diamond ring — which was not a tradition before.

And it was only the first step in the campaign.

The next step was making everybody pay a lot of money — depending on their budget.

As people had never bought a diamond before, nobody knew how much they should pay for a ring. And they were in different sizes, shapes, and colors.

So in one of the best ads in history, De Beers anchored the diamond price to salaries.
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Thanks to that campaign, we still buy diamond rings for proposals today.

And we use two months’ salary as an anchor.

Now, we can take away many lessons from this story — like association bias and mimetic desires.

But let’s talk about anchoring.

How anchors shape our decisions

The anchoring effect is when people depend too much on the first piece of information they get for decisions.

Let‘s say you go to a store.

If there are many $300 shoes, the one with a $150 label feels cheap.

In another store, the same pair of shoes become expensive if they are among the $75 ones.

And when there was nothing to compare —like diamonds— people used the information they got from the ad to assess the price.

Even when the anchor is extreme, we adjust it from that to an acceptable point.

Some other examples:

• Pricing: Steve Jobs used the anchoring effect on stage while introducing the iPad. When it was time to announce the price, he kept $999 on the screen for a minute. After that, he said the price will actually be $499. That sounded like a steal after $999.
• Negotiation: The first amount mentioned in a negotiation becomes an anchor. Companies keep salary offers low to make candidates use them as an anchor to negotiate.
• Courtroom: Prosecutors’ sentencing demand act as an anchor on judges’ decisions. So even when a judge disagrees with it, it still affects the outcome. And this can cause different sentences for the same crime.
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Anchoring is a strong bias.

Even irrelevant numbers we see before a decision can become anchors.

But you can still mitigate its effect and use it to your benefit.

Here are three ways:

1. Question your starting points

Some real estate agents first show you a mediocre house — knowing you won’t buy it.

Then they take you to the house that they want to sell.

After the first house, the second feels like “the one.”

And you’d more likely buy it on the spot when they also create urgency by mentioning other potential buyers.

Yes, the second house is better.

But is it worth the price?

Is it better than all other alternatives?

When making important decisions, stop and question your starting points.

Don’t let anchors blind your thinking.

2. Make your work incomparable

Let’s continue with the iPad.

Why did Apple call it iPad instead of Apple Tablet?

Because a “tablet” is a commodity.

Samsung, HP, Lenovo… They all have tablets.

So by giving it a unique name —and backing it up with product quality— Apple removed anchors from customers’ minds.

Today, people compare iPad prices with other iPad prices (air, pro) instead of other tablets.

So make your work and products incomparable.

The more you get away from being a commodity, the more pricing power you have.

3. Set the first anchors

We’ve talked about negotiations.

The first side that mentions a number sets the anchor.

So contrary to popular belief, be the first to offer a price or a timeline.

Even when it’s unacceptable for the other side, they will adjust from that number.

Remember how a few advertisers changed the behavior of millions, forever.

Set the first anchor to win the game before it starts.

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One recommendation:

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References:

1. Tversky, A., & Kahneman, D. (1974). Judgment under uncertainty: Heuristics and biases.
2. Birte Enough & Thomas Mussweiler (2006). Sentencing Under Uncertainty: Anchoring Effects in the Courtroom​
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You can reply to this mail with your thoughts and feedback. I'd be happy to hear from you — I read and reply to all messages.
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Have a great day.

Ozan
Founder - Frontera
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