How anchoring bias affects the way you make decisions

Culture  Learning
17 December, 2018

Don’t let irrelevant anchors limit your thinking and misguide your decisions

Here’s a math problem for you. No calculators – just take a couple of seconds to do it in your head and come up with your best guess. Ready? 

Multiply the following numbers:
8 x 7 x 6 x 5 x 4 x 3 x 2 x 1 

If you’re like most people, your guess would be in the range of 2,250. 

Now, here’s another one. 

Multiply the following numbers:
1 x 2 x 3 x 4 x 5 x 6 x 7 x 8 

For this problem, most people came up with a lower number – around 512. 

This was an experiment run by psychologists Daniel Kahneman and Amos Tversky. If you looked at both problems carefully, you would have realised that they’re exactly the same – simply presented differently. So, what accounts for the huge difference in people’s estimates? 

The answer lies in a fascinating phenomenon called anchoring bias. With just a couple of seconds to solve the question, you rely heavily on the first few numbers to come up with your estimate. In problem 1, the initial multiplications (8 x 7 x 6) lead you to a high number. In problem 2, the initial multiplications (1 x 2 x 3) lead you to a low number. (Interestingly, the actual answer is 40,320!) 

To put it another way, the first piece of information you learn becomes your anchor.You then use this as a reference point to reach your ultimate decision.  

Even arbitrary anchors can have an impact on decision-making. For example, in another study by Kahneman and Tversky, participants spun a roulette wheel that was rigged to stop at either 10 or 65. Afterwards, they were asked to guess the percentage of African countries in the UN. Those who spun 10 on the wheel guessed 25% on average, but those who landed on 65 estimated 45%. In this case, the anchor was completely unrelated to the question – but it still guided the answers. 

Drawing from this, my message focuses on how anchoring bias affects the way you make decisions, and approaches to reduce its impact in different contexts. 

How anchoring bias works 

To make decisions, we rely on mental shortcuts, known as heuristics. These rule-of-thumb strategies allow us to assess situations and make judgments quickly and efficiently. Without them, we would be lost in a sea of information, unable to arrive at any decision without lengthy, agonising analysis. 

While undoubtedly helpful in many situations, heuristics also lead to various cognitive biases – one of which is anchoring bias. In order to save time and effort, your brain seizes upon the initial, most easily available anchor – and uses it as a foundation for the decision. 

In their ground breaking 1974 paper, Judgment under Uncertainty: Heuristics and Biases, published in Science journal, Kahneman and Tversky explained it as follows: 

People make estimates by starting from an initial value that is adjusted to yield the final answer. The initial value, or starting point, may be suggested by the formulation of the problem, or it may be the result of a partial computation. In either case, adjustments are typically insufficient. That is, different starting points yield different estimates, which are biased toward the initial values. 

Everyday anchors 

The anchoring effect is commonly found in daily life.

Anchors come in various forms – a number, a trait, or one aspect of a situation.

For example, if you’ve ever bargained over an item, you know that the salesperson’s initial price is what sets the tone for the entire discussion. Or, you may have got stuck looking at a problem in a certain way – because it’s the first one that came to mind. Anchors can also lie in your past experience: for instance, if a person’s demeanour reminds you of a good friend, you’re likely to trust them more easily. 

Relying excessively on these often-random points of reference can cause you to make flawed, irrational choices. Conversely, the ability to recognise and overcome anchoring bias enables clear thinking and smarter decisions.

In the movie, Moneyball, the character of Billy Beane manages the cash-strapped Oakland Athletics baseball team. Having just lost three key players to wealthy teams, the selection committee meets to brainstorm. The selectors are entirely focused on replacing the lost stars, judging each potential candidate against the parameters of the previous player. This is the anchor around which all information is interpreted. 

As the conversation proceeds, Beane becomes increasingly annoyed. “You’re not even looking at the problem,” he insists, saying that it isn’t about finding three new players who are identical to their predecessors – because that’s impossible with their limited budget. The real problem is that Oakland Athletics is a poor team. What they need is a different approach to selection. Looking past the initial anchor is what allows Beane to deploy a pioneering selection strategy, which goes on to win the team huge success. 

How to curb the anchoring effect at work: 

What if we could take some of these insights to how we approach decisions in the corporate world? 

1. Hiring 

As you would know, in recruitment, one well-known anchor is the candidate’s previous salary, which forms the starting point for compensation discussions. But there are also other, less obvious anchors at work. You know how “gut instinct” plays a big role in who gets the job? Well, gut feelings are frequently anchored in bias. 

Based on the kind of people who are usually found in a particular position or field, your brain creates an ideal type of candidate. This reference point often has nothing to do with skills or abilities, but with social identity, background, mannerisms, etc. When you interview someone who reminds you of that archetype, you get “a good feeling” and are inclined to hire them. On the other hand, a highly qualified but atypical candidate may not inspire the same feeling. In this way, the anchoring effect puts both competence and diversity at risk. 

This isn’t hypothetical: a Yale study found that science faculty at prestigious American universities considered men as more suitable for STEM (science, technology, engineering, and mathematics) jobs, even when the resumes of male and female candidates were identical. Another study showed that investors preferred pitches from men entrepreneurs over women, despite the content being the same. 

With cognitive bias, we could end up perpetuating existing inequalities related to gender, ethnicity, sexual orientation, appearance, language, and so on. In his LinkedIn article, HR analytics: Dealing with ‘anchoring bias’, Shibu Warrier suggests structured interviews to limit these effects: 

Research says that a normal interview process has a very low validity (approx. 0.2). This could go up significantly higher if the interview is structured for the role. Structuring an interview needs to be based on insights from the existing database of past interviews – what worked and what didn’t. Interview questions with sharper focus on the job requirements can help a) the candidate share relevant experiences and b) the interviewer in evaluating the response. 

2. Performance evaluation 

Warrier explains that while he finds the bell curve technique efficient for distributing performance-linked bonuses, using relative performance as an anchor might not be the best way to manage individual performance: 

A good performance management system would ideally help the employee understand how he performed against his key result areas, and would provide objective inputs on how to build capabilities for his current and higher roles. A comparison with another individual may not necessarily motivate him to do better. 

So, next time you’re providing performance-related feedback to your team members, overcome the temptation to set someone else’s success as the anchor. Instead, focus on each individual’s performance, skills, and growth opportunities. 

3. Budgeting 

During budget discussions, anchoring bias can hold back targets and mislead us into focusing on the wrong thing. With the powerful influence of previous years’ numbers, we have a tendency to get stuck in the same range, regardless of current circumstances. In their McKinsey piece, Bias busters: Being objective about budgets, Tim Koller, Dan Lovallo, and Olivier Sibony recommend reanchoring to overcome the first-number bias: 

Reanchoring replaces the number in your head with one grounded in a different set of facts. To see how it works, imagine you are charged with setting your company’s sales targets for several different regions. You could take the following steps to reanchor yourself: 

  • Set some fact-based, non-historical criteria for determining sales targets
  • Build and calibrate a forecasting model based on these criteria
  • Use the model as a second anchor 

Variations of this reanchoring approach can be used in any target-setting or resource-allocation process where you want to challenge the status quo. It focuses debate where debate is really needed and helps reduce the inertia that anchoring induces. 

(For an in-depth explanation of the process, do take a look at the complete article.) 

4. Negotiation 

While negotiating, we generally hesitate to make the initial offer. After all, conventional wisdom dictates that we shouldn’t put our cards on the table; rather, we should let the other side speak first. However, that also means giving away the opportunity to set the anchor for the rest of the process. By deciding the starting point, you can control the range of possible counter-offers, hence nudging the discussion towards a decision in your favour. This is definitely a point worth considering when walking into a negotiation.

Can you think of anchors that are holding you or your team back? Do you have any good strategies to overcome them? 

As always, I look forward to your thoughts.

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