Thursday, October 4, 2012

Cognitive Bias: Anchoring Effect

Dan Ariely speaking at TED
Dan Ariely speaking at TED (Photo credit: Wikipedia)
Most questions we need to answer in life are not simple yes/no questions. Usually, there's a degree of uncertainty, and if the question is phrased in a certain way, it can influence the answer.

For example, take a look at a discount clothing store (ROSS, TJ MAXX, Marshalls, Burlington Coat Factory...)  and you see a certain item with three prices, the two higher prices having been crossed off. Do you think you got a bargain? If you accept that the highest price is what the item's worth, absolutely. That highest price is the anchor, and you have just been subjected to the "anchoring effect".

Anchoring effect usually applies to numbers. Dan Ariely in a study dated 2008 said that even just writing down an arbitrary number would "anchor" that person. Their experiment is to have people write down the last 2 digits of their social security number (for non-US people, this is much like national ID number), then try to name a price they would pay for a particular vintage of wine. Perhaps not so surprisingly, the people with higher social security number is willing to pay more for the wine, even if they know nothing about the wine.

And scammers knows everything about anchoring effect.

Anchoring effect was used in sales. You've all seen those infomercials... esp. Ron Pompeil and his various knifes, ovens, and whatnot. Would you pay $500? No. $300? No. $200? No. $150? No! Just $99!  This is heavily lampooned in all those parodies, but it works. The $500 is the anchor, and the cheaper it goes, the better you feel.

Scammers use this to their advantage two ways: by exaggerating the cost, then drop it down, and by minimizing the benefits, and raise it up.

Exaggerating the cost then drop it down basically means convincing you that the first price they named is what you *should* pay for it, but you'll get it much much cheaper! (Which may not be true)

Exaggerating the benefits, then raise it up and up, means showing you more and more benefit, like you can use it for this, this, this, and this, and that too! (Though you probably have to buy some accessories)

Both would lead you to gain the wrong impression on how much the item's really worth.
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