to the original anchor. Thus the first anchor influences not only the immediate buying decision but many others that follow.
We might see a 57-inch LCD high-definition television on sale for $3,000, for instance. The price tag is not the anchor. But if we decide to buy it (or seriously contemplate buying it) at that price, then the decision becomes our anchor henceforth in terms of LCD television sets. That's our peg in the ground, and from then on—whether we shop for another set or merely have a conversation at a backyard cookout—all other high-definition televisions are judged relative to that price.
Anchoring influences all kinds of purchases. Uri Simonsohn (a professor at the University of Pennsylvania) and George Loewenstein, for example, found that people who move to a new city generally remain anchored to the prices they paid for housing in their former city. In their study they found that people who move from inexpensive markets (say, Lubbock, Texas) to moderately priced cities (say, Pittsburgh) don't increase their spending to fit the new market.* Rather, these people spend an amount similar to what they were used to in the previous market, even if this means having to squeeze themselves and their families into smaller or less comfortable homes. Likewise, transplants from more expensive cities sink the same dollars into their new housing situation as they did in the past. People who move from Los Angeles to Pittsburgh, in other words, don't generally downsize their spending much once they hit Pennsylvania: they spend an amount similar to what they used to spend in Los Angeles.
It seems that we get used to the particularities of our housing markets and don't readily change. The only way out of this box, in fact, is to rent a home in the new location for a year or so. That way, we adjust to the new environment—and, after a while, we are able to make a purchase that aligns with the local market.
SO WE ANCHOR ourselves to initial prices. But do we hop from one anchor price to another (flip-flopping, if you will), continually changing our willingness to pay? Or does the first anchor we encounter become our anchor for a long time and for many decisions? To answer this question, we decided to conduct another experiment—one in which we attempted to lure our participants from old anchors to new ones.
For this experiment we enlisted some undergraduate students, some graduate students, and some investment bankers who had come to the campus to recruit new employees for their firms. Once the experiment started we presented our participants with three different sounds, and following each, asked them if they would be willing to get paid a particular amount of money (which served as the price anchor) for hearing those sounds again. One sound was a 30-second high-pitched 3,000-hertz sound, somewhat like someone screaming in a high-pitched voice. Another was a 30-second full-spectrum noise (also called white noise), which is similar to the noise a television set makes when there is no reception. The third was a 30-second oscillation between high-pitched and low-pitched sounds. (I am not sure if the bankers understood exactly what they were about to experience, but maybe even our annoying sounds were less annoying than talking about investment banking.)
We used sounds because there is no existing market for annoying sounds (so the participants couldn't use a market price as a way to think about the value of these sounds). We also used annoying sounds, specifically, because no one likes such sounds (if we had used classical music, some would have liked it better than others). As for the sounds themselves, I selected them after creating hundreds of sounds, choosing these three because they were, in my opinion, equally annoying.
We placed our participants in front of computer screens at the lab, and had them clamp headphones over their ears.
As the room quieted down, the first group saw this message appear in front of them: “In a few moments we are going to play a new unpleasant tone over your headset. We are interested in how annoying you find it. Immediately after you hear the tone, we will ask you whether, hypothetically, you would be willing to repeat the same experience in exchange for a payment of 10 cents.” The second group got the same message, only with an offer of 90 cents rather than 10 cents.
Would the anchor prices make a difference? To find out, we turned on the sound—in this case the irritating 30-second, 3,000-hertz squeal. Some of our participants grimaced. Others rolled their eyes.
When the screeching ended, each participant was presented with the anchoring question, phrased as a hypothetical choice: Would the participant be willing, hypothetically, to repeat the experience for a cash payment (which was 10 cents for the first group and 90 cents for the second group)? After answering this anchoring question, the participants were asked to indicate on the computer screen the lowest price they would demand to listen to the sound again. This decision was real, by the way, as it would determine whether they would hear the sound again—and get paid for doing so.*
Soon after the participants entered their prices, they learned the outcome. Participants whose price was sufficiently low “won” the sound, had the (unpleasant) opportunity to hear it again, and got paid for doing so. The participants whose price was too high did not listen to the sound and were not paid for this part of the experiment.
What was the point of all this? We wanted to find out whether the first prices that we suggested (10 cents and 90 cents) had served as an anchor. And indeed they had. Those who first faced the hypothetical decision about whether to listen to the sound for 10 cents needed much less money to be willing to listen to this sound again (33 cents on average) relative to those who first faced the hypothetical decision about whether to listen to the sound for 90 cents—this second group demanded more than twice the compensation (73 cents on average) for the same annoying experience. Do you see the difference that the suggested price had?
BUT THIS WAS only the start of our exploration. We also wanted to know how influential the anchor would be in future decisions. Suppose we gave the participants an opportunity to drop this anchor and run for another? Would they do it? To put it in terms of goslings, would they swim across the pond after their original imprint and then, midway, swing their allegiance to a new mother goose? In terms of goslings, I think you know that they would stick with the original mom. But what about humans? The next two phases of the experiment would enable us to answer these questions.
In the second phase of the experiment, we took participants from the previous 10-cents and 90-cents groups and treated them to 30 seconds of a white, wooshing noise. “Hypothetically, would you listen to this sound again for 50 cents?” we asked them at the end. The respondents pressed a button on their computers to indicate yes or no.
“OK, how much would you need to be paid for this?” we asked. Our participants typed in their lowest price; the computer did its thing; and, depending on their bids, some participants listened to the sound again and got paid and some did not. When we compared the prices, the 10-cents group offered much lower bids than the 90-cents group. This means that although both groups had been equally exposed to the suggested 50 cents, as their focal anchoring response (to “Hypothetically, would you listen to this sound again for 50 cents?”), the first anchor in this annoying sound category (which was 10 cents for some and 90 cents for others) predominated.
Why? Perhaps the participants in the 10-cents group said something like the following to themselves: “Well, I listened previously to that annoying sound for a low amount. This sound is not much different. So if I said a low amount for the previous one, I guess I could bear this sound for about the same price.” Those who were in the 90-cents group used the same type of logic, but because their starting point was different, so was their ending point. These individuals told themselves, “Well, I listened previously to that annoying sound for a high amount. This sound is not much different. So since I said a high amount for the previous one, I guess I could bear this sound for about the same price.” Indeed, the effect of the first anchor held—indicating that anchors have an enduring effect for present prices as well as for future prices.
There was one more step to this experiment. This time we had our participants listen to the oscillating sound that rose and fell in pitch for 30 seconds. We asked our 10-cents group, “Hypothetically, would you listen to this sound again for 90 cents?” Then we asked our 90-cents group, “Would you listen to this sound again for 10 cents?”