anchoring

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Million Dollar Listing, Bravo’s high-drama reality show about luxury Los Angeles real estate, features an agent who frequently uses anchoring with his clients. He uses a simple tactic to convince them that he got the best possible deal on a house (selling or buying). Rather than leading with the final deal, he first tells them the starting point of the negotiation, which they usually don’t like. He then explains how he landed a better deal for them. Here he is putting this tactic into action with an elderly woman selling her condo. The scene starts at minute 10:15 and ends at 11:30.

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1) Jodi Beggs on Greg Mankiw’s NYT column about work and taxes.

2) Behavioral economics and the high-minded movies in your Netflix queue.

3) Social shaming to boost alumni donations. An ill conceived idea, says Dan Greenberg.

4) The power of grammar. Imperfect vs. perfect aspect phrases affect your perception about a politician?

5) Dan Simons has a four-part series on the psychology behind using science as a marketing tool. Part I is here. Buyer beware.

6) Lesson for sustainable corporate social responsibility: Letting customers name their price for a product when half of proceeds go to charity is better for company and charity than when product is marketed with fixed percentage (20 %) of proceeds going to charity.

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A humorous take on the idea of anchoring on a reference point.

Hat tip: Corporation for Enterprise Development.

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A fascinating survey of people asked them about the perceived energy savings from a range of environmental behaviors (turning off lights, driving a more fuel efficient car, using energy saving appliances, etc.), and compared their answers to the actual energy savings of those same behaviors. One main takeaway from an online report about the survey is that people don’t know much about what saves energy. That’s sort of true, but not quite. As the authors of study (ungated here) write:

For a sample of 15 activities, participants underestimated energy use and savings by a factor of 2.8 on average, with small overestimates for low-energy activities and large underestimates for high-energy activities.

Why did they make these estimation mistakes? Why did they consistently not know that actions like tuning up a car twice a year produces a much bigger conservation impact than driving 60 mph instead of 70 mph for one hour? One answer is anchoring. The study’s survey offered respondents the reference point of an incandescent light bulb, which was described as using 100 units of energy over a one hour period. From there, respondents adjusted upward for other behaviors and appliances, knowing they used more energy, but not knowing how much more.

The authors argue that the incandescent bulb is a common reference point for most people today. That sounds fair. The broader lesson is this: If you’re like most people you don’t know a lot about how much energy various behaviors and appliances use. You do have a reference point, though, probably related to some action or appliance you use commonly and may have read something about. Whatever that action is, it’s probably affecting your ideas for reducing your energy usage, albeit not as much as you think.

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One airline (that shall remain nameless) told us recently that they “caught” some of their best reps using similar techniques to avoid dust-ups with customers over canceled flights.

For instance, imagine your 11:00 AM flight is canceled and you need to be in Cleveland tomorrow morning. There’s an evening flight that’s open. Where most reps would simply say “I can put you on a flight leaving at 9:00pm” other reps, knowing full well the 9:00 PM flight was available but seeking to manipulate the customer’s reaction, might say “well, I know I can put you on the 7:00 AM flight tomorrow, but let me see what I can do to put you on the earlier flight, which is at 9:00 PM tonight.” This technique of experience engineering is more commonly called anchoring. A less-desirable option creates a mental anchor, making the best alternative seem more acceptable. Rather than be irritated that the 11:00 AM was canceled, you’d probably be pleased that the rep has secured a seat for you on the evening flight.

Another way to think about this tactic is from a framing position. The customer service representative has shifted your reference point from 11 a.m. today to 7 a.m. tomorrow. From the first vantage point, 9 p.m. is a loss; from the second vantage point, it’s a gain.

From HBR article, “How Call Centers Use Behavioral Economics to Sway Customers.” Hat tip: Martin Bishop.

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The target company’s 52-week high exhibits a strong anchoring effect on merger and acquisition decisions, according to three economists in the working paper, “The Psychology of Pricing in Mergers and Acquisitions.” A Wall Street Journal article on the paper is gated. The full paper can be downloaded here. A summary is below:

The 52-week high stock price is widely available and represents a salient price level to investors and managers. Empirically, we show that the target’s 52-week high exercises a strong effect on the bidder’s offer price. A number of bidders offer exactly this price, demonstrating its unique salience. The effect is difficult to square with alternative explanations and appears best explained in terms of the use of the 52-week high as a reference point by the target’s shareholders or as an anchor in negotiations with the bidder.

Our evidence suggests that bidders’ shareholders view bids driven by the target’s 52-week high as overpaying: They react especially negatively to the component of the offer price driven by the target’s 52-week high. Most important, perhaps, is the fact that psychological pricing has real effects. Bids that exceed the 52-week high discontinuously increase the probability of deal success and thus the distribution of capital across firms’ alternative investment policies.

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Anchoring is one of the most common human biases. As an example (from Nudge), write down your phone number and add two hundred. Now answer when you think the Hun sacked Europe? In surveys, people’s answers differ by a few hundred years depending on whether they have a low or a high anchor.

Marketers have long been curious about how different prices affect customers’ ideas of a product’s value. In the February issue of Psychological Science, marketing professor Chris Janiszewski and research assistant Dan Uy of the University of Florida tackled the age old question of whether people are really fooled – or at least subconsciously nudged – by a price tag than ends with quirky .95 instead of a nice, round, even .00.

Continue reading the post here.

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