Anchoring Tendency
First information disproportionately influences subsequent judgment.
Key Principle
Generate your own estimates before seeing others' numbers.
Understanding Anchoring Tendency
Anchoring causes the first piece of information we encounter to have an outsized influence on our subsequent judgments—even when that information is arbitrary or irrelevant.
In one famous study, people were asked to spin a wheel that landed on either 10 or 65, then asked what percentage of African countries are in the UN. Those who saw 10 guessed an average of 25%. Those who saw 65 guessed 45%. The random number shouldn't have mattered, but it did.
Negotiations are profoundly affected by anchoring. Whoever makes the first offer often sets the range for the entire discussion. Initial prices, even ridiculous ones, influence what seems reasonable.
Real-World Examples
- Salary negotiations where the first number sets expectations.
- Initial asking prices affecting final sale prices of homes.
- Original projections influencing revised forecasts.
- List prices making discounted prices seem like deals.
How to Apply This
Make your own estimate before receiving any information
Recognize and resist the pull of irrelevant anchors
In negotiations, consider making the first offer strategically
Ask: Is this number based on reality or just the first number I heard?
Common Mistakes to Avoid
- Adjusting insufficiently from arbitrary starting points
- Letting first offers define the negotiation range
- Not questioning the basis of initial estimates
- Assuming anchors are rational just because they're stated
Notable Quotes
"Price is what you pay. Value is what you get."
— Warren Buffett