July 25 2011 10:21AM
Welcome to the second instalment of Better Know a Bias or Why Your Argument Sucks and You Are Wrong. What I want to illustrate with this series is that while we all believe ourselves to be rational, the evidence suggests otherwise. There are countless examples of ways in which our reasoning and decision making abilities are flawed. Becoming aware of them will help us to be more rational, to be right more often than wrong. It will also serve as a handy compendium to throw at trolls. It might also prevent you from buying a Ronco Showtime Rotisserie.
Anchoring is when people base their evaluation of an item or decision making process on one piece of information. They “anchor” all subsequent analysis to the first piece of evidence they encounter. Any piece of information can act as an anchor. Generally speaking anchoring is a consumer bias, it has the ability to significantly impact the amount people are will to pay for an item. This phenomenon was most notably demonstrated by Dan Ariely at MIT.
Ariely and some colleagues held an auction with 55 students from his marketing research class. They were trying to prove the existence of something called arbitrary coherence. Ariely explains, “although initial prices can be “arbitrary,” once those prices are established in our minds, they will shape not only present prices but also future ones. (thus making them “coherent”)” They were also interested in the ability of a random number to influence the price a person was willing to pay for an item. The key question was “would thinking about one’s social security number be enough to create an anchor? And would that initial anchor have a long-term influence?”
The professors presented the various auction items to the students. A few bottles of wine, cordless keyboard and mouse, a book, and some fancy chocolates. The students were given a sheet and asked to write the last two numbers of their social security number beside each item. Then write that number as a price. Next they answered yes or no if they were willing to pay that amount for each item. Finally they were asked to write the maximum amount they were willing to pay for each item. The sheets were collected and the winners given their prize. The students maintained that writing down the last two numbers of their social security number had not influenced their bids. What did the data say?
After analyzing the data they found that “the students with the highest-ending social security digits (from 80 to 99) big highest, while those with the lowest-ending numbers (1 to 20) bid lowest.” How much more were those with higher social security digits willing to pay? Those “in the upper 20 percent placed bids that were 216 to 346 percent higher...than those of the students with social security numbers ending in the lowest 20 percent.”2 An arbitrary number has the ability to influence how people value an item. This is the key to selling Ronco Showtime Rotisseries.
Start with the arbitrary $400 and by the time they have worked their way down to 4 easy payments of $39.95 people believe that they’re saving over $250 on their purchase. Just putting the number $400 in your head influenced the price you’d be willing to pay. This study shows that first impressions are extremely salient. Once a price or value has been established it influences our interpretation of subsequent data. While anchoring usually affects consumers it can also influence the way we evaluate hockey players.
Draft Position as an Anchor
The role that Nazem Kadri will play on the Leafs is a topic of much contention this summer. Many feel that should he fail to make a significant impact at the NHL level this season his future with the team is in jeopardy. This seems a tad rash. Drafted 7th overall in 2009 Kadri has played in 30 NHL games posting 3 goals and 9 assists for 12 points. He has also showed off his Nifty Mittens in the shootout. He ranks 12th in games played among his draft class and 10th in points. He has also seen success at the AHL level to the tune of 41 points (17 G, 24A) in 44 games with the Marlies. All things considered, Nazem is doing well in comparison to his peers.
Yet people are still concerned about his development because they have anchored their expectations to his draft position. Nazem is hardly the only player to be evaluated based on his draft position. Careers are defined by something the player has absolutely no control over. At this point Kadri’s draft position is irrelevant, the only thing we should be concerned with is if he becomes a capable NHL player. Most of the evidence suggests that he will be. Why are you freaking out?
The lesson we can learn from anchoring is that one piece of information has the ability to define all subsequent analysis of a player. Our first impressions are incredibly powerful and hard to eradicate. Once we have established the value of a player, as a result of either draft position or salary, it is incredibly difficult to alter that perception. Most people are unaware they have anchored themselves to one particular stat or another. We must be aware of our brain’s natural tendency to create anchors and to try and combat it by ensuring our opinions are based on as many relevant factors as possible.
So when someone tells you that Osgood should be in the Hall of Fame because he has 400 wins and a few cups, you can inform them that their argument is flawed because they have anchored themselves to irrelevant data.
- If you haven’t seen it, go watch, I’ll wait. Although I won’t be held responsible for any purchases of Ronco Showtime Rotisseries.
The story about the auction comes from Dan Ariely’s book Predictably Irrational. He also wrote a blog post about it.