Love at first sight, right? We have a tendency to rely heavily on the first piece of information we see, and this affects our finances! Maybe it’s paying the minimum balance, falling for a deal, or spending on a sale. There’s science behind why we love comparing prices, even when the numbers are far-fetched.
Let’s talk about getting anchored.
⏰ Today’s newsletter is 593 words, 3 minutes.
1 big thing: Weighing you down
👀 It was all there, hiding in plain sight. The ‘Amount Due’ on Sarah’s credit card statement was $5,000. Sure, she had the money to fully pay off her plastic, but the ‘Minimum Payment’ of $100 caught her eye first. Besides, one hundred bucks was a deal in comparison. Was she OK with paying a whole lotta extra interest, or did she succumb to a little brain quirk?
❗️ What’s going on? It’s a little bit sneaky, a little bit expensive, and very much a human thing to do. We have a tendency to rely heavily on the first piece of information we see when making decisions.
Hold yourself steady, let’s talk about the dizzying (and often costly) Anchor Effect.
❓ How does it work? Let’s say you see a pair of jeans for $1,250, and then a second pair for $1,000, you’re prone to view the second as cheap. We interpret newer information from the reference point of our anchor instead of viewing it objectively.
It doesn’t matter if the numbers are random or irrelevant, these digits can still create bias. I mean, who’s gonna spend $1,000 on jeans? Ok, maybe vintage Levi’s. Maybe.
⚙️ Why it matters: Anchors can skew our judgement and prevent us from changing our perspective on new information. When decisions on credit card payments are anchored on the ‘Minimum Payment’, people are more likely to repay less than they otherwise would and get zinged with interest.
Other popular anchors include car prices and consumer goods.
⚓️ Anchors away! Avoiding anchors would be awesome but very difficult – it’s a powerful and subconscious experience. It may seem realistic to just ‘be aware’ it’s there, but we often don’t realize it’s happening!
One evidence-based strategy to combat anchoring bias is to come up with reasons why an anchor is inappropriate for the situation. (study)
✅ Bottom Line: Challenging an anchor (even getting a friend to weigh in) builds an extra step and slows down your decision-making. Looking for other options is always a good idea.