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dangers of anchoring

Anchoring is a powerful psychological principle where humans will make decisions that ‘anchor’ to other pieces of information.

This can manifest itself in a multitude of different ways, and here are some examples:

  • We aspire to be doctors or lawyers because the entrance scores to gain entry into those degrees are the highest and most prestigeous. What’s to say, as humans we actually want to be a doctor or a lawyer?
  • We might look at relative wages in the system and fight for career paths for salaries that are high, and make decisions on that basis. If the careers they lead to make us miserable, we struggle to pivot into other jobs or careers because of the perceived step down in prestige.

In the context of money, anchoring can help you negotiate better deals, set ambitous goals and manage budgets, but it can also LIMIT your growth potential, lock you into patterns of normality, and limit your options.

Be careful not to make financial, personal and relationship decisions based on anchoring because you might close the door to good opportunities, or take opportunities that are not right for you.

How the psychology of anchoring is an asset and a liability; and how it can be weaponised against you

  • If there is a book of courses with entrance requirements a LOT of people will scrap over the courses with the highest number, and pick the one with the high score.
    • E.g. You might want to be a doctor or a lawyer just because it’s prestigous. Do you actually want to be a Doctor or a Laywer?
    • You may pick a University based on Brand - E.g. Melbourne University or Monash, and not look closely to see if the courses and costs are a good deal.
  • Relativity bias is real - and its easy to weaponise it against you.
    • We evaluate price options relative to anchors rather than in isolation.
    • You may debate the relative price of an IPhone Pro 512gb ram to and IPhone 256gb.
    • The IPhone 256gb seems heaps cheaper.
    • But Spec for Spec, you could get an Android Phone for 1/2 to 1/3 of the cost of Apple Phone with Better Specs. So what’s better?
  • Contrast effect:
    • People will pay stupid amounts more money for things that are desireable.
    • You may have backpacks that ship with 3 different fabric types. Each of the bags is functionally the same - but you’ll desire the one with the orange parachute fabric inside - compared to standard gray. For that difference the vendor can charge an extra $100 at an almost zero marginal cost and you’ll fall for it, because the orange is desirable.
    • This works in reverse too. Companies will create a high anchor price, to make the moderate options more attainable or desireable, even if the cost is still high high compared to entirely different options.

The anchoring effect creates powerful behaviours that may or may not be in your best interests. It’s up to you to control them. Most people cant.

Common anchoring tactics

These tactics show how to apply anchoring in various life scenarios to influence your own decisions or those of others.

Tactic
Life/money example
Option comparison
When looking at hotel options, compare the most expensive hotels to the cheapest - then find something in the middle that seems the most reasonable.
Original vs. target
When budgeting, set a low spending cap - so when you exceed it, you are alert to every expenditure to limit the overrun.
High/low framing
When buying a car, flip the logic. Don’t look at the cheap cars and be upsold to the more expensive model. Start with the expensive model - and look for reasonable savings in capability to find savings to get a better deal.
Goal based anchor
Set a hardcore fitness goal to walk every single day no matter what - and then limit the times you don’t follow the dictate. This is systems thinking.
Time based anchor
Plan a project with an ambitious deadline (1 month) and then crush yourself to make it. Even if you go over the deadline there will be real reasons to do so.

You can use anchor points to influence your own psychology and bend reality, and this is awesome when working with AI

Here are some techniques to use anchoring in personal and financial concepts:

  1. Set different anchors for yourself, and what you state publically.
    • You may think you can do something at full tilt in X time. But X time may be X-8 compared to others.
    • Don’t set the X time as the public target. Set it as X-8 and point to the average as the benchmark.
    • That #1 Gives you credibility, and #2 Allows you to then move at whatever speed you want.
    • You can deliver it faster, and get Kudos for that. Or you can slow walk it and just use the time to deliver something of exceptional additional quality.
    • You get to decide the relative benefits of doing it either way. If you are paid by the hour, doing it faster may not be of benefit for you. You just short change yourself.
  2. Align the anchor with your priorities:
    • If you’re saving for a house, and that’s your number 1 priority - make that your number 1 priority. Cut other things at all costs to get there.
    • And when setting a target, you may want to anchor savings to say 50k a year. If you then only hit 40k - TRYING - it’s OK. 40K is better than 30K. But at the end the mental frame matters.
  3. Be deliberate with your anchor points:
    • Know what the anchors are.
    • Be aware they are low or high.
    • Set the strategy in your mind what you’re trying to chase and stick to it.
  4. Take the time to put a contextual framework around an anchor point:
    • You should always understand real benchmarks when setting an anchor.
    • It gives you power in any negotiation.
    • If the going rate for services is $65, don’t be the guy that offers to do it for $45 straight out of the gate because you think it’s what you want. Be deliberate in that decision.

Misjudging your anchors can be a big mistake

You don’t necessarily need to follow the rules:

  • Think you need to go back to school and start over? Maybe not. Consider getting an adjacent role that puts you next to people with the skills you want. Start doing the work informally, prove yourself, then make the shift without going backward.
  • Instead of waiting for the right title or credentials, begin performing the work. Once you're beating others at it, you'll get recognised or can leverage those skills elsewhere.
  • If Big 4 consultants charge $2,400/day, your $1,800 rate suddenly looks like a bargain - even though it's still excellent money.
  • Before spending $15k on a diploma, consider alternatives. Could you learn the same skill independently and spend that money on marketing yourself into new opportunities instead?
  • Many people won't pay for tools that make them 30% more effective because they're conditioned to save money. But if that investment drives better outcomes, it pays for itself.

The key here is to challenge all assumptions on what it takes to get where you want to go. Often the most direct path is better than a traditional route.

Conclusion

Strategic anchoring, and understanding the psychology behind it will allow you to understand the reference points around you that influence you. As an extension of this you can use anchors to negotiate with others, and make desired outcomes more attainable.

Keep these in your backpocket as they’re very powerful psychological tools.

Finally - don’t be a patsy to anchors. Just because rules exist, doesn’t mean they can’t be broken.