Anchoring bias: The invisible hand behind decision-making

From the small decisions you make on a daily basis, to the big ones you make less frequently, you and your thinking process are often subtly influenced by cognitive phenomena. One of these, anchoring bias, plays a crucial role in steering your judgments and choices, even if you don’t notice its influence.

Effective product managers consider the ways cognitive biases affect marketing and pricing to steer user interactions with their product. This information is also important for estimating effort, creating timelines, and crafting budgets.

In this article, you’ll learn what anchoring bias is, how it affects your judgment and decision-making, as well as how to use it to your advantage.

What is anchoring bias?

Anchoring bias refers to the human tendency to rely too heavily on the first piece of information offered when making a decision. This first piece of information is called the anchor and it influences every other belief or decision that follows.

In other words, an anchoring bias impacts your judgments and decisions by moving them closer to the anchor. When you encounter a new situation or decision, the first information you receive sets the mental benchmark for everything that follows. Subsequent information and decisions are then interpreted in relation to this benchmark.

How does anchoring bias negatively affect the decision-making process?

Anchoring bias heavily influences the decision-making process. At its core, anchoring bias affects you by creating a reference point that might not be relevant or accurate. As a result, you tend to overvalue said reference point, which can lead to:

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• Twisted perception — Whether accurate or not, you set a mental anchor to the initial information you receive. This can lead to decisions that are not based on the most accurate information available
• Resistance to change — If new information drives you away from your reference point, it can be hard to change your perspective and be open to that new information. This can lead to a situation where you stick to initial plans or estimates, creating problems down-the-line
• Narrow field — In negotiations, the first offer often sets a frame for the rest of the discussion and the negotiation process. The anchor leads to a narrow field of possible outcomes

The effects of anchoring bias on product management

Now, let’s look at the effects of anchoring bias on product management. Anchoring bias affects you in several specific ways.

• Pricing strategy — Initial pricing decisions can serve as anchors, affecting both internal evaluations of a product’s worth and customers’ willingness to pay more for it. Price adjustments often are more difficult if the first anchor is set too high or too low. This can harm the whole product and influence the product development strategy
• Effort estimations — Anchors can influence the roadmap and timelines of product development. An initial low estimation leads to unrealistic expectations and insufficient resource allocation, high estimates lead to unnecessary expenditure of resources. It is hard to change resources due to the resistance of change with the initial set anchor
• Prioritization — In product development, agility and adaptability are crucial for success. With the selection of the first product features an anchor is set. This can lead to inflexibility and increase product risk
• Market analysis — Anchors can affect how new market data is interpreted. If an initial market analysis suggests a certain market trend and the following information suggests otherwise, people tend to value the initial analysis more and might steer the product development in the wrong direction

Examples of anchoring bias

You might think that anchoring bias is something you can easily avoid, but there are plenty of examples in your daily life where you’re confronted with anchoring bias. Here are some examples:

Product pricing

You often see the “original price” when you shop online. For example, before Black Friday companies often raise the prices only to lower the price back down and advertise this as a significant discount off the “original price.” Consumers then see the higher price first, which becomes the anchor and the reduced price becomes more attractive to the buyer.

Salary negotiations

In salary negotiations often the first set salary becomes the anchor for the subsequent negotiations. If the candidate is offered a starting salary, this starting salary becomes the anchor. On the other hand, if the candidate formulates his salary expectations first. These expectations become the anchor and the company has to respond to it.

Budgeting and forecasting

In annual budgeting, the prior year’s budget often serves as an anchor for the new budget. The department may adjust their requests up or down from this figure, rather than analyzing the actual needs for the next year. This may lead to insufficient planning and more costs.

First impressions

In dating, as well as in hiring, the initial impression of a person serves as an anchor for the following talk. This can influence the success of the date or the hiring process. Unfortunately, it can be hard to predict what a good first impression would be. For example, one might like the outfit of the other person, whereas someone else might think they overdressed.

Strategies to mitigate the effect of anchoring bias

Although you can’t avoid anchoring bias entirely, you can mitigate it with the following strategies:

• Acknowledge the anchor – The first step in mitigating anchoring bias is to be aware of an anchor and acknowledge its existence. Reflect on your information and the communication and be aware of certain anchors
• Gather more diverse insights — Seek more information from different sources. Do your research and find as many different viewpoints on a topic as possible
• Set a range — With the insights you gathered define a range of possible solutions. In negotiations, define a budget or a target range
• Set counter anchors — With the discovered range try to set counter anchors to your advantage
• Delay the decision — Don’t let someone pressure you to decide now. Take time and prepare. You need time to gather insights and to figure out the correct range
• Break down decisions and complexity — Often a big decision can be broken down into smaller ones. Breaking down these decisions reduces complexity and helps to mitigate risk

Final thoughts

Anchor bias is a subconscious effect that’s very difficult to avoid. However, you can minimize the risks of it by making yourself aware of it and using targeted techniques. When it comes to important decisions, you should take your time and think the decision through carefully.

Now, you can use anchoring bias to your advantage in product development, marketing, and negotiations.

Featured image source: IconScout

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