Anchoring and Adjustment

Essential Questions

• How do anchors influence numerical estimates and economic decisions?
• What evidence demonstrates insufficient adjustment?
• How can you design processes that reduce anchor-driven errors?

Overview

When asked whether the Mississippi River is longer or shorter than 2,000 miles, people who hear 2,000 give higher length estimates than those who hear 500. In salary negotiations, the first offer shapes the final agreement. Anchoring is a cognitive bias in which an initial number, even arbitrary, drags subsequent judgments.

In this lesson, you will review seminal experiments, analyze anchoring in financial forecasts and real estate pricing, and practice designing debiasing techniques such as checklists and algorithmic anchors.

Laboratory Foundations

Tversky and Kahneman's wheel-of-fortune experiment showed participants a random number between 0 and 100 before asking the percentage of African nations in the UN. Those who spun 65 guessed 45%; those who spun 10 guessed 25%. Anchors shift estimates via insufficient adjustment: people start from the anchor and adjust until they feel plausible, but the adjustment stops too soon.

Mathematically, you can represent anchoring as $\hat{\theta} = \alpha a + (1-\alpha) \theta^*$, where $a$ is the anchor, $\theta^*$ is the true value, and $\alpha \in (0,1)$ measures anchor influence. If $\alpha = 0.4$ and $a$ is 1,000 while $\theta^* = 500$, the estimate becomes $700$, showing a 40% pull toward the anchor.

Market Evidence

Anchoring affects housing markets: listing prices serve as anchors. Genesove and Mayer found that Boston condo sellers who bought at higher prices set higher list prices and achieved higher sale prices, even controlling for market conditions. In finance, analysts' earnings forecasts anchor on last year's numbers, leading to underreaction to new information.

Negotiations reveal strategic anchoring. Opening offers strongly correlate with settlements. Studies of eBay auctions show that higher starting bids lead to higher final prices even when they reduce initial bidding activity.

Debiasing Strategies

To combat anchoring, organizations use algorithmic benchmarks. Investment firms rely on quantitative models to provide objective estimates before analysts discuss. In medicine, triage protocols mandate evidence-based thresholds rather than first impressions. In negotiations, setting a "BATNA" (Best Alternative To a Negotiated Agreement) anchors decisions on outside options rather than opponent offers.

Training can also help. Encouraging "consider-the-opposite" reasoning prompts decision makers to actively adjust away from anchors. Structured analytic techniques, like red teaming, introduce counter-anchors to offset bias.

Further Reading

• Judgment under Uncertainty: Heuristics and Biases
• Genesove and Mayer on Loss Aversion and Housing Prices
• Epley and Gilovich on Anchoring Adjustment