Anchoring effect

Currently, the anchoring effect influences the pricing of a wide range of items and commodities. The goal of this research is to investigate how anchoring effects affect the high or low pricing of subjective and objective objects. Sixty people were chosen at random from Brooklyn College and the surrounding area to participate in the experiment. Friends, family members, and students were among those who took part. Our study had a 2x2 split amongst subjects. Subjectivity and the anchoring effect were the independent variables, whereas the estimated price of an object was the dependent variable. Four questionnaires with five questions each were distributed to participants. The surveys were carried out under four different situations. The results were statistically analyzed using descriptive statistics and regression analyzed using multivariate analysis and R-square analysis. The results obtained indicated cofound interaction between some items. Subjectivity anchors have higher influences on anchoring effect than objective anchors. The paper also highlights inferences from our experiment and additional variables to consider in future research.

Keywords: anchoring effect, subjectivity, objective and subjective items, low prices, high prices

Introduction

Anchoring effect is a type of cognitive bias causing customers to divert their focus on the ’anchor’ which is the first accessible piece of information provided to them during decision making (Smith, 2011). Anchoring effects sway choices relating to numerical values, for instance, pricing, both cost-plus, and value-based on buyers tend to make decisions based on anchored prices. Anchoring uses the advantage of in-sales circumstances to fix products prices. An example of subjective anchoring effect is fixing higher prices which might deter probable customers from purchasing (Smith, 2011). Though, when a seller advertises a lower sale price for a similar product, customers make more purchases because the new price looks like a better deal. Thus, the higher original price assists as an anchor (Smith, 2011). Customers willingly purchase products if the prices are set lower than the original. Anchoring effect can affect the ability of customers to find reasonable and fair prices. The purpose of conducting this research experiment is to provide a replication of ’Susceptibility to anchoring effects: How openness-to-experience influences responses to anchoring cues’ work completed by Todd and Keith in 2007. I will specially analyze how subjective and objective items impact anchoring effect.

According to Todd and Keith anchoring effect involves the alteration of one’s assessment, lower or higher, depending on an ’anchor’ (Todd & Keith, 2007). Todd and Keith highlighted on how the difference in openness-to-experience personality traits of people affect anchoring effects. Researchers over the last few years have widely examined the five-factor model of personality. Openness to experience is the fifth personality factor model which indicates the inclination to alter behaviors and beliefs when exposed to new ideas or information (Todd and Keith). People with higher scores in openness-to-experience personality adjust to new ideas and information unlike those with lower scores. Thus, the trait of openness mirrors personal tendencies to adjust one’s behaviors and consider additional external information. In their work, Todd and Keith hypothesized that the judgment of people with the high openness-to-experience trait would be highly influenced by formerly presented anchors while those with low openness trait will be least influenced by the anchors (McElroy & Dowd, 2007). Anchor (high or low) was the manipulated variable while openness-to-experience was the observed variable. To test the hypothesis, they conducted two experiments using the length of Mississippi River and the percentage of African countries in the united nations as anchors (McElroy & Dowd, 2007). Results indicated that people high in openness trait are more likely to adjust to new ideas and information, and the same is vice versa with those low on this trait.

In this paper, we will analyze how subjective items influence people’s feelings or expectations like painting and objective items that people have a price range in mind influence anchoring effect. We expect that within the objective or subjective item, the projected price will be higher for high anchor and lower for the low anchor. Additionally, within a low or high anchor, price estimated will have a wider range of subjective items than objective items. For the experiment, we hypothesize that even though the anchoring effect will be present in both objective and subjective items, a bigger difference in price estimate will be observed in subjective items. To test the hypothesis, we asked participants if the average of the item is lower or higher. Secondly, participants were asked to estimate the actual price of the subjective and objective item. Participants will take part in four surveys each with five questions. It is predicted that participants will incline more on selecting subjective items such as fossil replica ammonite, Van Gogh painting, red wine, puppy, and antique doorknob than on objective items such as a diamond ring, first-class plane ticket, luxury car, concert ticket, and MacBook.

Methods

Participants

Sixty participants were randomly selected from Brooklyn College. Participants comprised of students, family members, friends, and co-workers of various ages and genders.

Materials

The stimuli were made up of twenty question in four surveys. Each survey has a total of five questions. Four distinct conditions were utilized, one condition for each survey. The first condition had subjective items with a high anchor; fossil replica ammonite, Van Gogh painting, a bottle of red wine, antique doorknob, and a puppy. The second condition consisted of subjective items with the low anchor. Thirdly, objective items having a high anchor, for example, diamond ring, first-class plane ticket, Jay Z concert ticket to Europe, MacBook, and luxury car. Lastly was objective items with low anchors. The prices of each item were either forty percent higher or forty percent higher than the actual price, depending on the anchor.

Design and Procedure

The design of our study was a 2x2 design between subjects which composed of independent variables of anchoring effect and subjectivity, whereas the dependent variable was an estimate of price for an item. The anchors were the low or high price for a particular item. Participants were informed about the nature of the experiment and when they consented they were given the four surveys. At first, participants were asked to state if the average of the item selected is either high or low without knowledge of anchor use. They were later asked to estimate the actual price of items under each condition and indicate the value in the surveys.

Results

To investigate how low or high pricing anchors influences subjective or objective items, price estimates for subjective and objective items under four conditions were collected. Noteworthy anchoring effect in two out five subjective items, painting and fossil which is similar to two out five objective items (plane ticket and diamond ring). Descriptive statistics were used for results analysis. The dependent variables were estimated painting, estimate fossil, estimate wine/car, and estimate puppy/concert. Factors between subjects were tested using R-Squares analysis. Multivariate test was also used to determine the marginal difference.

Graph 1: Interaction between painting and plane ticket

Graph 2: Interaction between Fossil and diamond ring

Graph 3: Interaction graph between Wine and car

Graph 2: Graph of puppy estimate

Graph 1, 2, and 3 portray significant interaction between high or low anchor types for subjective and objective items. When items were compared as in the graphs above, the level of interaction was high. Anchoring effect affected the subjectivity of all time. in the antique doorknob, the results of anchoring effect were reversed, thus insignificant.

Discussion

The effects of anchoring were observed in all items, and noteworthy effects of subjectivity were also found in all items. As observed in the graphs provided in the results section, more participants estimated prices for subjective items, unlike objective items. The graphs also provide different interactions. In graph one, the interaction between painting and plane effect show high interaction effect. Anchors for graph 1 and 2 have negative gradients implying that a lot of participants estimate high value for painting and plane ticket during low sales. The results, therefore, proofed our hypothesis because we found that anchoring effects are more notable in subjective items than in objective items.

Anchoring effects can easily change the opinion or behavior of people. As described by Campbell and Sharpe (2009), anchoring effect influences the actions of people. Some individuals are always willing to adopt or adjust to new changes, while a few do not incline to new ideas or information. People who are more open to trying new things are in a position to be under more influence of anchoring effect than people who do not (Campbell & Sharpe, 2009).

One importance of anchoring effect is to help business. Market prices can be set using the effect. For example, establishing and managing discounts and price structures. When setting market prices, a seller assigns a particular value to an item, if the demand is low the seller decides to give a certain percentage discount, using the previous value as an anchor (Smith, 2011). Reduction of price levels subjects a lot of customers to make a purchase. In contrast, when the demand is too high, the seller might decide to elevate the price of a product which in turn might affect purchasing behavior.

In future research experiments, I recommend the addition of more variables to determine how age and gender influence anchoring effects. Males and females of different ages are influenced to buy different products. What male customers can buy due to influence is not similar to what females can. On the other hand, teens and adults have different influencing factors when making purchases. Thus, it is important to carry out a future research touching on gender and age variables.

References

Campbell, S. D., & Sharpe, S. A. (2009). Anchoring bias in consensus forecasts and its effect on market prices. Journal of Financial and Quantitative Analysis, 44(2), 369-390.

McElroy, T., & Dowd, K. (2007). Susceptibility to anchoring effects: How openness-to-experience influences responses to anchoring cues. Judgment and decision making, 2(1), 48.

Smith, T. (2011). Pricing strategy: Setting price levels, managing price discounts and establishing price structures. Nelson Education.