ANCHORS AWEIGH: There is another side to anchoring, using it for advantage. Think car salesman who wants to make sure you know the manufacturer’s suggested retail price. Author Blair Enns offers a disciplined process to selling without pitching, including using anchoring bias to guide the negotiations. Drop an anchor, but buyer beware.
Anchoring is one of the most powerful techniques of effective pricing. You are subjected to it all the time and if you're not using it in your own pricing, you're almost certainly selling fewer higher-priced solutions, leaving serious money on the table.
DO SOME MATH: Solve the following equations by estimating an answer in less than five seconds: 1 X 2 X 3 X 4 X 5 X 6 X 7 X 8 =? 8 X 7 X 6 X 5 X 4 X 3 X 2 X 1 =? Then...
BE HUMBLED:Laurie Santos, a psychology teacher at Yale, will help you understand why you were a) wrong and b) came up with different answers to the same question framed in a different way. Here’s a hint, you anchored on a small number first and a larger number second.
ANCHOR ARTFULLY: In a 2009 edition of the American Economic Review, researchers Alan Beggs and Kathryn Gradyy tested the extent to which current art auction prices are anchored by previous sales. Don’t know your Manet from your Monet? That’s okay, just concentrate on how the study seemed to confirm a higher rate of bias with Impressionist works versus Contemporary art. Why? We still don’t know, but how recent the anchor was produced and how steady it is appeared to be contributing factors.
This paper shows that the price of a painting sold at an art auction and the experts' pre-sale valuations are anchored on the price at which the painting previously sold at auction. We are able to separate anchoring from rational learning by using the identifying strategy that the unobservable component of quality for a particular painting remains constant between the last auction sale and the current auction sale.
BRIDGE THE GAP: Peruse The Behavior Gap (2012) by Carl Richards. For visual learners, the book is full of stories told through pictures drawn with a sharpie and cocktail napkins instead of historical anecdotes. Now that is art!
Patrick Huey is the author of two books: "History Lessons for the Modern Investor" and "the Seven Pillars of (Financial) Wisdom"; this is considered an outside business activity for Patrick Huey and is separate and apart from his activities as an investment advisor representative with Dynamic Wealth Advisors. The material contained in these books are the current opinions of the author, Patrick Huey but not necessarily those of Dynamic Wealth Advisors. The opinions expressed in these books are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security. They are intended to provide education about the financial industry. To determine which investments may be appropriate for you, consult your financial advisor prior to investing. Any past performance discussed in these books is no guarantee of future results. As always please remember investing involves risk and possible loss of principal capital.