There’s an interesting psychological phenomenon that I think we’ve all encountered, and that is applied heavily in economics at the individual level. It’s called the anchoring effect, and it occurs when people are exposed to information, then asked to guess values for information of the same type but a different area. In the case of economics, the only information in question will be numbers, so I’m going to focus on the anchoring effect in relation to prices.
The anchoring effect is the influence that prior information has on current predictive abilities. Amos Tversky and Daniel Kahneman were colleagues and two of the first researchers in this area. They were psychologists who dabbled in behavioral economics, and their findings were groundbreaking enough to win the Nobel Prize for Economics. One of their most famous studies on anchoring bias involved showing participants high or low numbers on a roulette wheel, and then having them guess the percentage of the U.N. that were African nations. The two numbers were 10 and 65, and the participants who were shown 10 guessed lower on average, about 25%, while the participants who were shown 65 guessed higher on average, about 45%.
This is fascinating when applied to economics, as individuals who are shown baseline values decided their purchases based on those values. The anchoring effect really comes into play in negotiations. Imagine negotiating with someone about the price of a phone. If they name a high starting price of say $1,000, that is the baseline number, and it becomes your anchor. If you guys negotiate the price to say, $750, you might think that was a great deal. However, this is where the anchoring effect comes into play. That $750 phone seems great compared to the $1,000 phone, and so you bought it at that price, without realizing that you may not have bought the phone had it been initially offered at $750. By shifting the initial price up, and “willingly” accepting price cuts, the company is tricking consumers into buying the item at its normal price, and turning a profit either way.
A more relevant example that affects many of us students is the clothing retail business. Companies like Kohl’s and JCPenney all seem to have clothing on sale. This is no fluke, it’s because they are using the anchoring effect. In fact, JCPenney thought they could bypass the eternal sale and bargain pricing and instead simply bring “everyday low priced” clothes. They underestimated the anchor effect, however, and sales dropped. So, they returned the bargain model and customers returned.
The anchoring effect is a very interesting psychological phenomenon that has extensive applications in economics and negotiations. If ever you’re in a negotiation, start high. Maybe you can take advantage of the anchoring effect and emerge on top.
https://psychcentral.com/blog/the-anchoring-effect-how-it-impacts-your-everyday-life/
I think that the anchoring effect and the way it is utilized in marketing tricks definitely affects the way that people spend. It's similar to the reasons why stores will price things at 5.99 or 10.99, with the goal of making consumers pay more under the guise that they are paying less. With eternal sales, it seems like companies can capitalize on people desire's for bargains. This also manifests during shopping events like Black Friday, where stores make a large majority of their yearly profits as consumers are under the impression they'll be getting large discounts when in reality they might just be getting normally priced items. The anchor effect comes into play because huge 50 percent or 60 percent sales might motivate people to purchase already overpriced items at a normal selling price.
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