Never Too Cool For School | Drop anchor at the right creek

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If you’ve ever purchased a commodity ‘at a bargain’ after a long bout of haggling, you have in all probability come under the influence of the incorrigible cognitive bias known as anchoring. The trick then is to know how to use it to your advantage.

Bargaining is an inelegant waltz — or tango, if you will — in which the dancer who sticks to his own judgment will probably walk away feeling like he has got value for his money.

Imagine a scene in a busy market area of a touristy spot in India. The location isn’t important to the story, just a placeholder to set the scene — it could be Goa, Hampi, or Jaipur. There is plenty of hustle and bustle; you can easily spot two-wheelers snaking along the road, swerving around humans and the odd cow; you wouldn’t spot locals shopping in these areas, but there are many foreigners, probably wearing a kurta-type garment. It is here that the shopkeepers, some of them in makeshift structures, are trying to sell you their wares — a tee-shirt proclaiming your love for the place, trinkets and knick-knacks, figurines and others. You have no idea of who the shopkeeper is; neither does the shopkeeper know who you are. You are looking to buy an item at the lowest price but he is trying to sell the same item at the highest price. The game has begun.

Interested in buying an item, you wander into a shop, eyeballing the items before settling on a couple and then proceed to ask about the price. A familiar dance-off ensues. He quotes a number high enough to buy a flight ticket back home. You complain and suggest a lower price. He talks up the intricacies of the designs and bemoans labour problems and the hafta he has to pay. You persist. He sticks to his story and mentions his supposed break-even price. You pull out the big guns, threatening to walk away in a huff. He acquiesces. You walk away with the item but somehow can’t shake off the feeling that you have overpaid for it.

All of us can probably recall similar stories from our own lives, wherein we have felt that we couldn’t reduce the price of an item sufficiently. In all probability, we have all fallen prey this cognitive bias called ‘anchoring’. And the existence and effects of this bias was one of my earliest learnings in the first few weeks in B-school.

In simple language, anchoring bias is the tendency to give excessive consideration to the first piece of information offered when making decisions. This initial piece of information (here, the price) is called the “anchor” (and hence the name “anchoring”). In the previously described scene, the initial price acted as the anchor, wherein the subsequent prices were talked in relation to this price. Research has shown that people are fixated on this number even though it may be irrelevant to the decision to be made. In class, we learned about how economists Amos Tversky and Daniel Kahneman uncovered this bias. In a famous experiment, subjects were asked to estimate the percentage of African countries in the United Nations. A wheel of fortune acted as the anchor — subjects were instructed to indicate whether their estimate was higher or lower than the number on the wheel (0 to 100, denoting percentages), and then estimate the quantity by moving upward or downward. Amazingly, the estimates depended heavily on the number that turned up on the wheel. Another such experiment involved students having to make an estimate (in 5 seconds) of the product of numbers from 1 to 8, but their estimates varied heavily based on the order in which the numbers were provided — from 1 to 8 (leading to a lower estimate) or 8 to 1 (leading to a higher estimate).

 

 

Anchoring typically happens when it is hard to assign a fundamental value to something, but once an initial anchor is established, people cling on to it and adjust their estimates to set a relative value based on the anchor available. And if you feel that such a bias would never affect someone as sophisticated as you, think again — research has shown that even experienced practitioners (real estate agents, in this case) who have plenty of ‘domain expertise’ are also guilty of basing their pricing estimates on anchor values (in this case, prices assigned to properties).

Surely, there must be a limit to this? What would happen if the shopkeeper emulated Dr. Evil (for the uninitiated, a character from the Austin Powers series) and asked for an obscene sum? You’d simply walk away and this scheme would fall flat. The trick, as the professor pointed out, is to figure out how much you would be willing to pay for an item and anchor at that value. And it was at this moment that I recognised a very sophisticated and subtle form of anchoring that I had missed all this while.

If you reside in South India and are saree-shopping for a wedding (or any occasion which may prompt you to buy many sarees), the town of Kanchipuram (famous for its silk sarees) may be a natural destination for your purchases. The sarees can be bought directly from the weaver (at the lowest price, since the weaver is the producer), and with each middleman, the price typically increases by 20-30% at every step — hence, the same saree’s cost can vary significantly depending on where you buy it. Therefore, it makes economic sense for people who are buying a lot of sarees (or a few expensive ones) to take time off and buy them at Kanchipuram as they would “get more for the same money”, even after accounting for travel expenditure.

But buying directly from the weaver isn’t a practical option for most buyers: you need to know your stuff regarding the silk and the jari, you have limited options and may have to purchase many sarees of the same design. Therefore, most people buy at shops in Kanchipuram, where they are guaranteed of variety as they aggregate sarees from different weavers (with their markup, of course). And herein begins a well-choreographed move.

The shops know that the customers are there for wedding shopping and naturally appeal to the customers to start with the wedding saree, reasoning that they probably want to spend the maximum time selecting the most “special” saree (which also happens to be the most expensive one). A budget for the saree is subtly solicited with a few samples from different price ranges, with the intention of uncovering the customers’ hand; the customers are happy to oblige as well, as they are dazzled by the greater choice available at much lower prices.

From here on, the sarees are presented in descending order of price, inundating the customers with outstanding variety and delighting them with amazing service. The customer takes a lot of time for the first few sarees and then time pressure invariably has its say later on (because they have to travel back home after the shopping), with the result that they buy later sarees at the higher end of the customers’ price range. The outcomes (from an economic perspective) would have probably been different if they had started in ascending order, but my guess is everyone is happy with this outcome as the customers get to spend more time on the sarees that they are most attached to and don’t mind it as they are getting them at “bargain” prices anyway.

(In this series, a 35-year-old chronicles his experiences after moving abroad for an MBA, taking on conventional wisdom, grande-size debt, and a harsh winter.)

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