You’d better not let that conversation be the clincher, because you’ve probably just fallen victim to the confirming-evidence bias. The anchoring trap is an easy one to fall for. For example, the author highlights The Bay of Pig, Challenger disaster and Watergate breaks as some of the mistakes that resulted from groupthinks decision trap. Because the media tend to aggressively publicize massive damage awards (while ignoring other, far more common trial outcomes), lawyers can overestimate the probability of a large award for the plaintiff. That’s a form of anchoring bias. For example, if you first see a T-shirt that costs $1,200 – then see a second one that costs $100 – you’re prone to see the second shirt as cheap. Below are three examples of the most common decision making traps according to Hammond et al. If the penalties for making a decision that leads to an unfavorable outcome are overly severe, managers will be motivated to let failed projects drag on endlessly—in the vain hope that they’ll somehow be able to transform them into successes. Widmar says the key is to ask yourself, “If I weren’t currently choosing this option, would I choose it from my alternatives?”. For Constructed Response 3, have the students bring in examples of anchoring in print or online media. Once you become aware of the status-quo trap, you can use these techniques to lessen its pull: Another of our deep-seated biases is to make choices in a way that justifies past choices, even when the past choices no longer seem valid. ... A relativity trap is a psychological or behavioral trap that leads people to make irrational choices when making spending decisions. Seek information from a variety of people and sources after thinking through the problem on your own. Most of us have fallen into this trap. Try not to be guided by impressions. Get views of people who involved in the original decisions. On days that are hazier than normal, our eyes will tend to trick our minds into thinking that things are more distant than they actually are. 1. The original question surrounding the … Recall in the beginning of this series, I suggested the myth in decision making is that a problem, crisis or opportunity can in fact be resolved with a well-timed decision when, in truth, problems are rarely solved and instead merely contained. The bank finally solved the problem by instituting a policy requiring that a loan be immediately reassigned to another banker as soon as any problem arose. If the business does have a good chance of coming back, that’s a wise investment. A dramatic or traumatic event in your own life can also distort your thinking. The hidden traps in decision making can affect the profitability of a company. The Anchoring Trap. 6 Anchoring Bias Examples That Impact Your Decisions 1. One of us helped a major U.S. bank recover after it made many bad loans to foreign businesses. As we said at the outset, the best protection against all psychological traps—in isolation or in combination—is awareness. Our past decisions become what economists term sunk costs—old investments of time or money that are now irrecoverable. Force yourself to choose. “Always consider various ways to evaluate a situation.”. The second frame, with its reference point of $2,000, puts things into perspective by emphasizing the real financial impact of the decision. For example “Is your budget more or less than $100,000” seems like a simple question, but it definitely sets the anchor. There is a great deal of experiments that prove this magnetic attraction to the status quo. Learn more in CFI’s Behavioral Finance Course. Take a second look at the more sensitive estimates. Howard Raiffa is the Frank Plumpton Ramsey Professor of Managerial Economics Emeritus at the Harvard Business School. Think of the implications for business decisions, in which major initiatives and investments often hinge on ranges of estimates. And taking action to understand and avoid psychological traps can have the added benefit of increasing your confidence in the choices you make. They were then told that they could easily exchange the gift they received for the other gift. The first automobiles, revealingly called “horseless carriages,” looked very much like the buggies they replaced. Then challenge your estimates of the extremes. Favoring alternatives that perpetuate the existing situation Example: A key merger stumbles because the acquiring company avoids imposing a new management structure on the acquired company. A marketer attempting to project the sales of a product for the coming year often begins by looking at the sales volumes for past years. This trap dominates all other alternatives in order to maintain the existing state … In one, a group of people were randomly given one of two gifts of approximately the same value—half received a mug, the other half a Swiss chocolate bar. Using tools such as checklists can also help decrease anchoring bias. The status quo trap. Anchors influence the decisions not only of managers, but also of accountants and engineers, bankers and lawyers, consultants and stock analysts. The traps we’ve reviewed can all work in isolation. As a result, our minds never become calibrated for making estimates in the face of uncertainty. The sunk-cost bias shows up with disturbing regularity in banking, where it can have particularly dire consequences. Anchoring or focalism is a term used in psychology to describe the common human tendency to rely too heavily, or "anchor," on one trait or piece of … This forces us to rely heavily of the initial piece of information we receive, and use it as a point of reference with much weight. Emphasize the need for honest input to anyone who will be supplying you with estimates. When considering a problem, the mind gives disproportionate weight to the first information it receives. … occurs when a person is influenced unconsciously by the initial piece of information (considered to be the Anchor), which in turn affects their final decision. How would you answer these two questions? Highly complex and important decisions are the most prone to distortion because they tend to involve the most assumptions, the most estimates, and the most inputs from the most people. In their 2006 Harvard Business Review Article, “The Hidden Traps in Decision Making,” John S. Hammond, Ralph L. Keeney and Howard Raiffa offer a series of common psychological traps that affect the way people make decisions. “Is the population of Turkey greater than 35 … This sort of things is going on in loads of different … The first is our tendency to subconsciously decide what we want to do before we figure out why we want to do it. The Anchoring Trap. Try these techniques: Imagine that you’re the president of a successful midsized U.S. manufacturer considering whether to call off a planned plant expansion. The original question surrounding the decision you are trying to make has already created an anchor. Decision makers display, for example, a strong bias toward alternatives that perpetuate the status quo. Although there are occasional genuine loss leaders, much of the value that customers perceive is based on little more than anchoring. Many experiments have shown the magnetic attraction of the status quo. It’ll look like tens of thousands of other logos and will help your business get lost in the crowd. Their decisions about whether to settle a claim or take it to court usually hinge on their assessments of the possible outcomes of a trial. The overconfidence trap makes us overestimate the accuracy of our forecasts. The Status Quo Trap: The second bias that could be negatively impacting your decision-making … Tell them as little as possible about your own ideas, estimates, and tentative decisions. Downplay the effort or cost of switching from the status quo. An anchor is a thing that serves as a reference point for our comparisons. In psychology, this type of cognitive bias is known as the anchoring bias or anchoring effect. In this case, a status quo is introduced in some versions of choices, by marking the water distribution option chosen by the former Commissioner in a similar drought situation. In this column, I’ll describe how anchoring, ordering, framing, and loss aversion affect people’s decisions. © 2020 All Rights Reserved. The Anchoring Trap. Subjects were asked whether the percentage of U.N. membership accounted for by Afri… To reduce insurance costs, two neighboring states, New Jersey and Pennsylvania, made similar changes in their laws. The market-planning department, responsible for the decision, asked other departments to supply forecasts of key variables such as anticipated sales, dealer inventories, competitor actions, and costs. For example, I've got an experiment done with two sets of surgeons who specialize in lung disease. The source of the status-quo trap lies deep within our psyches, in our desire to protect our egos from damage. For example, when it comes to website design, if you don’t help people understand in a few seconds how you can solve their problem, they’ll leave your site. As leaders attempt to navigate the endless streams of choices that come their way, decisions serve as temporary anchors that provide a momentary respite to catch our breath, gather our bearings and ready ourselves to navigate the next wave of decisions. Unbeknownst to the subjects, each list had an equal number of men and women, but on some lists the men were more famous than the women while on others the women were more famous. But the two states framed the choice in very different ways: in New Jersey, you automatically got the limited right to sue unless you specified otherwise; in Pennsylvania, you got the full right to sue unless you specified otherwise. If the problem lies in your own wounded self-esteem, deal with it head-on. Position yourself to excel in your career by attending one of our professional development workshops. Be honest with yourself about your motives. Whereas, if you’d merely seen the second shirt, priced at $100, you’d probably not view it as cheap. Plan D: This plan has a two-thirds probability of resulting in the loss of all three cargoes and the entire $600,000 but has a one-third probability of losing no cargo. The researchers found that people make insufficient adjustments from an initially presented value (an anchor) when coming to conclusions. Research highlights Anchoring bias is a process whereby people are influenced by specific information given before a judgement. Making business decisions is your most crucial job—and your riskiest. This trap is the tendency to rely too heavily on the first … Examples of Anchoring Bias. At points throughout the process, particularly near the end, ask yourself how your thinking might change if the framing changed. Anchoring can occur when an individual or group latches onto the first information they encounter about a decision. Anchors take many guises. This paper reviews 40 years research on this very robust finding which occurs with many different judgements. Anchoring can be very subtle and the really good sales rep can drop an anchor very subtly. Don’t cultivate a failure-fearing culture that leads employees to perpetuate their mistakes. Try to imagine circumstances where the actual figure would fall below your low or above your high, and adjust your range accordingly. Though we can’t get rid of them, we can learn to be alert to them and compensate for them—monitoring our decision making so that our thinking traps don’t cause judgment disasters. In the words of Hammond, Keeney and Raiffa, “The anchoring trap leads us to give a disproportionate weight to the first information we receive.” According to Widmar, anchors come in all forms. When others recommend decisions, examine the way they framed the problem. The best way to avoid the estimating and forecasting traps is to take a very disciplined approach to making forecasts and judging probabilities. are discussed in relation to the anchor. There are two fundamental psychological forces at work here. “Decision traps are built-in flaws in our thinking,” she says. It’s not that you shouldn’t make the choice you’re subconsciously drawn to. But there’s another set of traps that can have a particularly distorting effect in uncertain situations because they cloud our ability to assess probabilities. Through daily practice, our minds become finely calibrated. So, for example, imagine that you are buying a new car. Look for distortions caused by the frames. But managers who are aware of the dangers of anchors can reduce their impact by using the following techniques: We all like to believe that we make decisions rationally and objectively. Anchoring and relying on first impressions This trap is the tendency to rely too heavily on the first piece of information we receive when trying to make a decision. We get through the day with heuristics. Once an anchor is set, other judgements are made by adjusting away from that anchor, and there is a bias toward interpreting other information around the anchor. Psychological traps are easy to fall for when it comes to making business (or any) decisions, says Nicole Widmar, associate professor of agricultural economics at Purdue University. Copyright © 2020 Harvard Business School Publishing. According to Widmar, anchors come in all forms. The original question surrounding the decision you are trying to make has already created an anchor. Once an anchor is set, other judgements are made by adjusting away from that anchor, and there is a bias toward interpreting other information around the anchor. It’s so basic to how we experience the world that we often don’t notice it. This simple mental shortcut helps us to make the continuous stream of distance judgments required to navigate the world. As a result, they offer larger settlements than are actually warranted. Essentially be open-minded. Price negotiations are always affected by the first number mentioned But “later” is usually never. Pears targeted the problems of wrinkles if the consumer … Psychological Anchoring is a term used to describe the human tendency to rely too heavily on one trait or piece of information when making decisions.In the 1974 paper \"Judgment Under Uncertainty: Heuristics And Biases,\" Kahneman and Tversky conducted a study where a wheel containing the numbers 1 through 100 was spun. For further discussions of decision traps, see: J. Edward Russo and Paul J. H. Schoemaker, Decision Traps: The Ten Barriers to Brilliant Decision Making and How to Overcome Them (New York: Simon & Schuster, 1989) and Max Bazerman, Judgment in Managerial Decision Making (New York: John Wiley & Sons, fourth edition, 1998). Furthermore, they tend to adopt the frame as it is presented to them rather than restating the problem in their own way. The status quo trap biases us toward maintaining the current situation–even when better alternatives exist. Researchers have identified a whole series of such flaws in the way we think in making decisions. You will assign a higher probability to traffic accidents if you have passed one on the way to work, and you will assign a higher chance of someday dying of cancer yourself if a close friend has died of the disease. Forewarned is forearmed. The old numbers become anchors, which the forecaster then adjusts based on other factors. Consider this anchoring bias example from Harvard Business School and Harvard Law School faculty member Guhan Subramanian. Ask yourself whether you would choose the status-quo alternative if, in fact, it weren’t the status quo. The anchoring trap. In business, a common anchor is a past event or trend. Many people would first say, “Okay, where’s the stock today?” Then, based on where the stock is today, they will make an assumption about where it’s going to be in three months. The anchoring trap was explained to them with other examples and its consequences. Be open minded. In a discussion at a board meeting, if the first speaker has a strong opinion, they can sway the whole tone of the debate, focusing not on what is right, but on the extent to which the first speaker is right. The keys to avoiding them are open-mindedness and critical thinking.“Carefully seek others’ input to compare and contrast with your own,” she says. When a prospective customer first learns about your brand, they hear your company’s name or see your logo. Try posing problems in a neutral, redundant way that combines gains and losses or embraces different reference points. “Let’s not rock the boat right now,” the typical reasoning goes. Psychologists have found that people have a tendency to rely too heavily on the very first piece of information they learn, which can have a serious impact on the decision they end up making. All rights reserved. Smart Choices: A Practical Guide to Making Better Decisions, John S. Hammond, Ralph L. Keeney, and Howard Raiffa. Breaking from the status quo means taking action, and when we take action, we take responsibility, thus opening ourselves to criticism and to regret. Sticking with the status quo represents, in most cases, the safer course because it puts us at less psychological risk. Anchoring or focalism is a cognitive bias where an individual depends too heavily on an initial piece of information offered (considered to be the "anchor") to make subsequent judgments during decision making.Once the value of this anchor is set, all future negotiations, arguments, estimates, etc. The consultants could have been much more aggressive and creative in their counterproposal—reducing the initial price to the low end of market rates, adjusting rates biennially rather than annually, putting a cap on the increases, defining different terms for extending the lease, and so forth—but their thinking was guided by the owners’ initial proposal. Be particularly wary of anchors in negotiations. Shoppers pour over endless sales ads, map their shopping routes and time their visits all for the chance to receive steep discounts. The hidden traps in decision making can affect the profitability of a company. Some, like the heuristic for clarity, are sensory misperceptions. Making decisions is the most important job of any executive. This simple test illustrates the common and often pernicious mental phenomenon known as anchoring. While no one can rid his or her mind of these ingrained flaws, anyone can follow the lead of airline pilots and learn to understand the traps and compensate for them. If you’re like most people, the figure of 35 million cited in the first question (a figure we chose arbitrarily) influenced your answer to the second question. A Google studyshowed that they can be made in 17 milliseconds! A dramatic first impression might anchor our thinking, and then we might selectively seek out confirming evidence to justify our initial inclination. All of the traps we’ve discussed so far can influence the way we make decisions when confronted with uncertainty. Let’s look at a small sample: 1. The authors describe what managers can do to ensure that their important business decisions are sound and reliable. And if you find that an adviser always seems to support your point of view, find a new adviser. A leader of a group may unintentionally anchor a group’s thinking by presenting their opinion or analysis first in a decision-making process. What’s the strongest reason to do something else? In the early 1900s, a sales manager approached the Advertising Guru Claude Hopkins for marketing a toilet soap made up of Palm and Olive Oils. In one series of tests, people were asked to forecast the next week’s closing value for the Dow Jones Industrial Average. When considering a decision, the mind gives disproportionate weight to the first information it receives. While your answers to both questions should, rationally speaking, be the same, studies have shown that many people would refuse the fifty-fifty chance in the first question but accept it in the second. The test contained three questions from which two were important for the experiment: 1. They find the status quo comfortable, and they avoid taking action that would upset it. When information is given up front, that later affects the decision that is made. For example, the initial price offered for a used car sets the standard for the rest of the negotiations , so that prices lower than the initial price seem more reasonable even if they are still higher than what the car is really worth. How to avoid the anchoring effect. First impressions matter. When comparing alternatives, always evaluate them in terms of the future as well as the present. The first frame, with its reference point of zero, emphasizes incremental gains and losses, and the thought of losing triggers a conservative response in many people’s minds. This simple experiment illustrates anchoring – a common and sometimes harmful trap in decision making. Remember the wise words of Warren Buffet: “When you find yourself in a hole, the best thing you can do is stop digging.”. When a borrower’s business runs into trouble, a lender will often advance additional funds in hopes of providing the business with some breathing room to recover. And the recallability trap prompts us to give undue weight to recent, dramatic events. The way the human brain works can sabotage our decisions. Reassign responsibilities when necessary. 2. TIP- Ask the people involved to think about the issue individually before inviting discussion as a group to avoid anchoring on the first idea presented. The Status Quo Trap. Once again, the two questions pose the same problem. The anchoring effect is one of the most robust cognitive heuristics. The anchoring effect is a cognitive bias that influences you to rely too heavily on the first piece of information you receive. “Understanding what these traps are and how they affect decision making is critical to understand how people arrive at their conclusions.”. Without fail, the answers to the second question increase by many millions when the larger figure is used in the first que… Much money has been wasted on ill-fated product-development projects because managers did not accurately account for the possibility of market failure. In this article, we examine a number of well-documented psychological traps that are particularly likely to undermine business decisions. Not surprisingly, the number of cars produced far exceeded demand, and the company took six months to sell off the surplus, resorting in the end to promotional pricing. For example, used car salesmen often use ‘anchors’ to start negotiations. When considering a problem, the mind gives disproportionate weight to the first information it receives. How might leaders adapt to such significant transitions in order to maintain success? Faced with this choice, 80% of these respondents preferred Plan D. The pairs of alternatives are, of course, precisely equivalent—Plan A is the same as Plan C, and Plan B is the same as Plan D—they’ve just been framed in different ways. The Anchoring Trap can cause alternatives to be clustered around the “anchor,” throwing off estimates, forecasts, and consideration of wider-ranging alternatives. Ability, personality, processing styles and mood have a small impact on anchoring judgements. You read online that the average price of the vehicle you are interested in is $27,000 dollars. While managers continually make such estimates and forecasts, they rarely get clear feedback about their accuracy. Get someone you respect to play devil’s advocate, to argue against the decision you’re contemplating. If I were to ask you where you think Apple’s stock will be in three months, how would you approach it? For a 4 bedroom, 5000 square foot home this may be a reasonable list price, but in the case of a one bedroom 1000 square foot house located in the country, this price point is absurd. No one can avoid their influence; they’re just too widespread. She, of course, says to cancel. In many cases, they can be traced back to the way the decisions were made—the alternatives were not clearly defined, the right information was not collected, the costs and benefits were not accurately weighed. Another group in the study, however, was asked to choose between alternatives C and D: Plan C: This plan will result in the loss of two of the three cargoes, worth $400,000.