Anchoring And Adjustment Heuristic: Why Is Anchoring Important To Managers? - Anchoring Bias Video
The anchoring and adjustment heuristic is common strategy that most people make when they make decisions. As far as we call tell people use this heuristic: Even CEOs and presidents of countries. We all have decision-making biases, and this psychological bias is just one of those common biases.
Basically, anchoring and adjustment occurs when you have a framing or a mental picture in your mind, you adjust your decisions relative to that mental picture. For example, if you ask people to guess the number of countries in Africa, but you give them a large number to think about about, they will guess larger than if you frame a small picture in their mind.
In some ways, it displays diminishing returns to some imaginary mental model.
There are some fun examples that quite relevant to managers and students.
For example, you are more willing to waste $1 on a $20000 purchase than on a $1 purchase.
You can get people to spend more money and make more purchases if you have them think about massive savings than they are just getting a good deal with the sticker price.
You are likely to feel more pain when the stock-market falls when it was high for several months than if it was only temporarily high.
You likely feel more pain when you experience several periods of good service at a restaurant than it regresses back to its true value than if you have several periods of bad experience and it goes back to its true value.
If you define any reference point, we are likely to try to anchor against that performance target, and feel emotions accordingly.
What can you do with the knowledge of the anchoring and adjustment heuristic? Set goals that are quite high, and continuously adjust to those goals. However, know that there is a trade-off with how you feel with this reference-point.
References:
Tversky, A.; Kahneman, D. (1974). "Judgment under Uncertainty: Heuristics and Biases". Science. 185 (4157): 1124–1131.
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David Maslach is a research professor of entrepreneurship, innovation, and business strategy, I discuss topics, such as behavioral science, strategy, innovation, and entrepreneurship, and apply these to my new peer proofreading and editing platform. Topics include the sharing economy, altruism, investing in technology, and bounded rationality. My favorite videos pertain to incentives, goal setting, and learning from failure to drive behaviors such as weight loss, stopping telemarketers, creating novel technologies, and creating new movements.
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