Beware the Effects of Price Anchoring

As a followup to yesterday’s post on stupid money, I wanted to share some thoughts about the so-called price anchoring. I first ran across the concept of price anchoring while reading Dan Ariely’s Predictably Irrational.

In short, price anchoring refers to the practice of establishing a high reference point against which you’ll compare prices when evaluating a deal. The goal here is to make the current price seem small by comparison. And guess what? It’s not very hard to do this because we’re hard-wired to make relative comparisons in such situations.

If you’re paying attention, you’ll see price anchoring at work all around you. The MSRP on that shiny new car? Anchoring. That oddly expensive item on the restaurant menu that nobody would ever order? Anchoring. The price label at the store showing both the regular and sale price? Anchoring.

One of my favorite examples of this is the perpetual “sale” prices at mall jewelry stores. As I’ve noted in the past, some stores actually admit that “original prices may not have resulted in actual sales.” In other words, they effectively marked it up so they could immediately mark it back down and make it look like a deal.

In another case, I saw a commercial advertising a trinket for $299 alongside a “will be” price of $399. What’s that, you say? A “will be” price? What does that even mean? It means that they’re selling the item at full price, and using a theoretical future price increase to make you think it’s a great deal.

Of course, price anchoring can also work in reverse. When haggling over a price – especially if you’re dealing with an inexperienced (or motivated) seller – opening with a lowball offer can tip the scales in your favor. Yes, there’s a chance that you’ll offend the seller and they’ll simply walk away. If not, however, you’ll have established a low baseline for subsequent counteroffers.

The point here is simply that you need to be aware of the anchoring effect when making decisions. Will you be able to overcome it on a regular basis? Perhaps not – at least not entirely. No matter how rational you think you are, your brain is by nature susceptible to these sort of games. But you can use this knowledge to your advantage when the tables are turned.