Anchoring and (Insufficient) Adjustment 

Question(s)

• Condition 1 → is the tallest tree shorter or taller than 400 feet? How tall is it?

• Condition 2 → Is the tallest tree shorter or taller than 1000 feet? How tall is it?

Amos Tversky and Daniel Kahneman

• Founder of school of heuristic and biases in judgement and decision making 

Tversky and Kahneman (1974)

• % of African countries in the United Nations? 35% (in 1974)

  • Condition 1 → more/less than 10% ? 25%

  • Condition 2 → more/less than 65% ? 45%

• 8! = 40,320

  • Condition 1 → 1x2x3x4x5x6x7x8 ; Median = 512

  • Condition 2 → 8x7x6x5x4x3x2x1 ; Median = 2,250

Anchoring and (Insufficient) Adjustment

• “Anchor” on an initial value (as a starting point), then 

• “Adjust” from that anchor, but insufficiently

• Usually “under-adjust”

• Why?

  • Limited attention 

  • Primacy effect

  • Deliberate human information-integration habits (even when the anchor value is crazy)

    • Was Gandhi more or less than 214 (9) years old when he died? (Strack & Mussweiler, 1977)

• So what is wrong with forming an estimate by starting with one value and then adjusting it successively? 

Slovic, Fischhoff, & Lichtenstein (1982)

• Participants: Students; real gamblers in Las Vegas

• Two taste: Price vs Choice

  • Choice: Which of the two gambels would you prefer to play?

  • Price: How much money would you accept, instead of playing?

• Gamble A: 11/36 prob of winning $16; 25/36 prob of losing $1.50

• Gamble B: 35/36 prob of winning $4; 1/36 prob of losing $1

• EV for both gambles ≈ $3.85

• Price Task → Gamble A > Gamble B

• Choice Task → Gamble B > Gamble A

• Preference reversals → Money pump

What is a money pump?

• Say the decision maker person holds Gamble B. The exploiter says, “ I see you price Gamble A higher - pay me a small fee and I'll swap your B for A”. The individual pays the fee because in the pricing frame, A is “worth more”

• Now the person holds Gamble A, but if you ask them directly to choose, they might prefer B over A – so the trader offers to swap back to B for another fee

• Repeating this cycle, the person keeps switching between A and B, each time losing a little bit of money 

Anchor effects in everyday financial situations 

• Northcraft & Neale (1987)

  • Professional real estate agents assessed the value of a residential property

  • They were provided with a detailed 10-page summary of the characteristics of the houses in the area, and then visited the property to assess its fair market value 

• Condition A → Listing price: $65,900 → Appraised at $67,811

• Condition B → Listing Price: $83,900 → Appraised at $75,190

• Actual listing price and appraised value was $74,900 

Ariely, Loewenstein, & Prelec (2003)

• Classroom auction of products such as bottles of wine, books, luxury chocolates etc.

• Market values %70 on average 

• “Look at the last two digits of your SSN. Would you pay that amount for this bottle of wine?”

  • E.g if the last two digits are 94 would you pay $94 for a nice bottle of wine 

• r=+. 40 between the final bids and SSNs

  • E.g Highest SSN (90-99) → $39

  • Lowest SSN (00-19) → $12

• However within each person there was a consistent ordering of products

Anchoring on the present 

• Retrospective personal memory is affected by anchoring on the current state 

Markus (1986) 

• A longitudinal study on change in stability and political attitudes

• 1,669 participants along with a parent were surveyed in 1973 and again in 1982

• Topics” Legalization for marijuana, equality for women, political views etc

• “How conservative/liberal are you?”

  • 1(conservative)  2   3   4 (neutral)     5   6   7 (liberal)

• In 1982 → “how did you respond in 1973 to the political view scale”

  • Recall of their 1973 attitude was close to that of 1982 attitude than their actual 1973 attitude 

• Parents attributed more stability to their attitude, even though in fact they were slightly less stable 

Anchoring and (insufficient) adjustment

• It is one of the most prevalent heuristic: start with the most salient or most important facts, and then adjust in the direction you think the truth lies

• Problems: Our limited attentional capacities; item by item information search tendency