The rigged roulette wheel experiment that discovered the bias
In 1974, Daniel Kahneman and Amos Tversky published one of the most cited experiments in the psychology of judgment in the journal Science: they spun a wheel numbered 0 to 100 in front of their subjects, which, unbeknownst to them, was rigged to stop only on 10 or 65. They then asked: is the percentage of African countries in the United Nations higher or lower than that number? And next, what do you think the exact percentage is?
Subjects who saw the wheel stop on 65 gave, on average, a notably higher final estimate (45%) than those who saw it stop on 10 (25%), even though the wheel's number was obviously random and had no real connection to the question. Kahneman and Tversky named this phenomenon 'anchoring and adjustment': we start from an initial value (the anchor) and adjust our estimate from there, but that adjustment is almost always insufficient, leaving the final estimate skewed toward the original anchor.
The real estate agent study: even professionals couldn't escape the anchor
Researchers Gregory Northcraft and Margaret Neale took the experiment into the real world in a 1987 study: they gave a group of professional real estate agents and a group of students the same information about an actual property, varying only the listed asking price. They then asked both groups to estimate the property's fair value.
Both the students and, surprisingly, the professional real estate agents themselves (who insisted they hadn't been influenced by that figure) gave significantly higher value estimates when the listed asking price was higher, and lower estimates when it was lower. Not even professional experience protected against the anchor.
The costliest anchor in your own investments: the price you paid
imagine you bought a stock at $50 and it now trades at $30. That $50 price becomes your mental anchor, and many later decisions (sell? hold? buy more?) get evaluated against that reference figure, instead of against the only question that actually matters: given what you know today about the company, is this the best possible use of your money going forward?
The $50 price has no special meaning for the company, the market, or your financial future: it's just the number you happened to see first, exactly like the number on Kahneman and Tversky's roulette wheel. This same mechanism sits behind the loss aversion we covered in the first chapter of this series: the purchase-price anchor is what psychologically defines whether a sale feels like a 'gain' or a 'loss.'
How retail and marketing use anchoring on purpose
Anchoring doesn't only happen by accident: it's used deliberately in marketing and negotiation. Crossed-out 'reference' prices in a sale ($99 crossed out, $59 final price) are explicitly designed to anchor your perception of value at the higher figure, making the final price look like a bargain even when it's actually the price the company always intended to sell at.
In negotiation, the person who makes the first offer usually ends up, on average, with a more favorable outcome than the one who waits for the other side to speak first, precisely because that first figure mentally anchors the entire range of the negotiation that follows, even though both sides rationally know it's just a starting point.
- Crossed-out price in a sale: anchors your perception of value at the higher figure.
- First offer in a negotiation: anchors the perceived range of the entire negotiation.
- Purchase price of an investment: anchors your criteria for deciding whether to sell it.
How to protect yourself from anchoring bias
The most effective defense is to explicitly ask yourself the question the anchor prevents you from asking naturally: completely ignoring the price you paid, the asking price you were offered, or any other reference figure, what is the best possible decision given the information you have today? It's the same question, applied to a different problem, we already saw as a defense against the sunk cost fallacy.
Actively seeking a second, independent anchor (an outside valuation, the current market price, the opinion of someone with no knowledge of the original price) before deciding also helps dilute the disproportionate weight of the first figure you saw.
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Frequently Asked Questions
It's the tendency to rely too heavily on the first piece of information received (the anchor) when making an estimate, even when that information is arbitrary or irrelevant, described by Daniel Kahneman and Amos Tversky in 1974.
No. Northcraft and Neale's 1987 study showed that even professional real estate agents, who insisted they weren't influenced by the listed asking price, gave value estimates systematically skewed toward that figure.
Because the purchase price becomes a mental anchor against which you evaluate any later decision, instead of objectively assessing whether that investment is still the best option today given the current information.
Because that first figure mentally anchors the range of the entire negotiation that follows, even when both sides rationally know it's just an arbitrary starting point.
By explicitly asking yourself what the best decision would be while completely ignoring the reference figure, and by seeking a second, independent anchor (an outside valuation or another source unrelated to the original price) before deciding.