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Beware the Effects of Price Anchoring

Written by Nickel - 2 Comments

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.

Published on August 24th, 2011
Modified on September 5th, 2011 - 2 Comments
Filed under: Consumer, Frugality

About the author: is the founder and editor-in-chief of this site. He's a thirty-something family man who has been writing about personal finance since 2005, and guess what? He's on Twitter!

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2 Responses to “Beware the Effects of Price Anchoring”

  1. 1
    BG Says:

    Good stuff, and this article reminds me of those Auction shows on TV like “Pawn Stars”, and “Hardcore Pawn”.

    Watch the negotiation tactics that the store owners use on their ‘customers’, it is amazing. They use the “low-ball” offer tip (you mentioned) all the time, and normally get that low-ball price anchored at step #1 in the negotiations.

    One of the episodes had a customer _PAYING_ the store owner to take an item. Hilarious!

  2. 2
    Nickel Says:

    BG: Believe it or not, an earlier draft of this post actually had a paragraph about Rick’s (Pawn Stars) negotiation tactics. In short…

    Be very friendly while making a few negative comments about the item (condition, market, whatever) to diminish the perceived value and reduce expectations. Then ask the seller to name a price. Laugh it off, make a super low counter offer (often just a fraction of the asking price) while reiterating your comments about the condition of the item, market for selling it, etc. and work from there.

    While you might think that the seller could anchor the price by giving a high number going in, most people pawning stuff are motivated sellers and afraid to go too high. Plus, they’ve been swayed by the opening round of negative (but cheerfully delivered) comments, so they often end up reducing their target price before they even open their mouths.

    On top of this, the pawn shop guys are generally well informed and have a good feel for the actual value in the marketplace, so they’re not swayed by the initial number. Instead, they get the seller to give ground up front, then hit them with a lowball offer. It’s amazing how quickly many of the sellers will crumble.

    I dropped this material from this post because I thought the topic was worth of a post in itself. I will likely cannibalize this comment as the basis of a forthcoming post about negotiating tactics. :-)

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