ANCHOR EXPERIMENT
When Baby Goose (aka Gosling) is born, it considers whatever it sees as its mother and gets attached to it. Similarly, humans have an inherent tendency to consider the first thing we see as an anchor.
An experiment was done at MIT. The students were shown products for which they had to bid. The initial bid of the products were the last 2 digits of their Social Security Number (Like Aadhaar in India) and we will call it XX. The students were asked if they would be willing to spend at least XX amount on the product. If the answer is then no, how much were they willing to spend.
E.g. 2 students have XX values as say 10 and 40. They were asked if they will be willing to spend XX value to buy a newly launched chocolate. We don’t know the real worth of the chocolate. They will first tell if they are willing to spend at least XX amount or not and if not, then how can they pay for it.
After the experiment was over, it was found that there was a correlation between the XX value and the bid of the student. In a rational world, this should not have mattered.
This was one such experiment that showed that the value of a product is determined by what anchor price for the product do we have. This has very important implications in real life.
One significant point: The anchor of the Social Security Number worked because the students were asked to make a decision based on its value. If the initial anchor had been different like the temperature of the room, then the results might have been different.
CHANGING HOMES
The price of the same home in different cities would most likely be different. In an experiment, it was found that people changing homes consider the previous price of the house and buy the house accordingly.
For example, if a family move from Bangalore to Mumbai, they will end up buying a house with the same cost as Bangalore, even though it might be a bit smaller in Mumbai. Similarly, if they move to a city with cheaper house cost, then they would end up buying a bigger than.
SELF-HERDING
Can the anchor change? If we have set an anchor for something, can we change it?
First, let’s understand herding.
If we are looking for a restaurant and see there is a queue outside a restaurant, we might end up standing in the queue ourselves. Others might do the same seeing us. This is called herding because we are making our decisions, based on the behaviour of others.
Now consider we drink our coffee in Café Coffee Day(CCD). One day, we are outside Starbucks which has costlier coffee (2X price) than CCD and decide to drink there. The next day, we again go to Starbucks because we enjoyed the last time. On the third day, we go to Starbucks because the last 2 times were fun. And it becomes a habit, and we never look back to CCD. We might even consider increasing the size of the cup from Tall to Grande to Venti. This is Self-Herding where we make decisions based on our past decision.
But the question is why did we go to Starbucks for the first time? Logically, the price of Starbucks was higher than CCD. It was because of the ambience. When we first decided to go to Starbucks, we must have heard that the ambience is good inside and that served as an anchor for us to visit Starbucks, and we compared the ambience of Starbucks to that of CCD.
The power of the first decision might look that it is not much. But it can be huge in terms of consequences.
ANCHORS IN CONSUMER PREFERENCES
In economics, there is a law of supply and demand. The prices of a product in the market are determined by the balance between the supply side and the demand side.
This theory is not entirely correct.
First, the consumer doesn’t have a way to know the real worth of a product. They consider whatever price they first see as the anchor price and buy that product in future based on that price.
Secondly, the relationship between demand and supply is not only based on preference but also memory.
If the price of wine reduces by half and milk become double, we might see that in short term, the people consume more wine and lesser milk because of the previous price they knew.
Now if the same thing happens, but they don’t have any previous memory of the prices, they might not be consuming in the same pattern.
CONCLUSION
Most of the time, people are not aware of the real value of things. For things like healthcare, medicine, water, electricity and education, we need external forces to set up the price. Government can have a large role to play in this.