The anchoring and adjustment Heuristic

What is Heuristic
• Heuristics are the strategies derived from
previous experiences with similar problems.
• These strategies depend on using readily
accessible, though loosely applicable,
information to control problem solving in
human beings, machines and abstract issues
 How it all started
• Amos Tversky and Daniel Kahneman, who brought the anchoring and adjustment
heuristic to psychologists’ attention, provided a clear demonstration of the
insufficiency of adjustment.
• They spun a “wheel of fortune” and asked participants if certain quantities were
higher or lower than the number on which the wheel landed. The participants
were then asked to estimate the precise value of the quantity in question.
• For example, some participants were asked whether the percentage of African
countries in the United Nations is higher or lower than 10%. Their subsequent
average estimate of the actual percentage was 25%.
• Other participants were initially asked whether the percentage of African
countries in the United Nations is higher or lower than 65%. Their average
subsequent estimate was 45%. Thus, the initial anchor value, even when its
arbitrary nature was quite apparent, had a pronounced effect on final
judgments.
 What Is Anchoring and Adjustment?
• Anchoring and adjustment is a phenomenon wherein an individual
bases their initial ideas and responses on one point of information and
makes changes driven by that starting point.
• The anchoring and adjustment heuristic describes cases in which a
person uses a specific target number or value as a starting point,
known as an anchor, and subsequently adjusts that information until
an acceptable value is reached over time.
• Often, those adjustments are inadequate and remain too close to the
original anchor, which is a problem when the anchor is very different
from the true answer.
• People typically fail to adjust sufficiently. That is, the initial value exerts
some “drag” on the final estimate, systematically biasing the result.
Anchoring and Adjustment Heuristic Definition

• Life requires people to estimate uncertain quantities.

• How long will it take to complete a term paper? How high will mortgage
rates be in five years? What is the probability of a soldier dying in a
military intervention overseas?
• There are many ways to try to answer such questions. One of the most
common is to start with a value that seems to be in the right ballpark
and then adjust it until a satisfactory estimate is obtained.
• “My last paper took a week to write, but this one is more demanding so
maybe two weeks is a good guess.” “Mortgage rates are low by historic
levels, so perhaps they’ll be a couple of points higher in five years.”
• “The fatality rate in the last war was 1.5%, but our enemies are catching
up technologically; maybe 4% is a more likely figure in the next
conflict.”
 Understanding Anchoring and Adjustment
• Anchoring is a cognitive bias described by behavioral finance in which individuals
fixate on a target number or value—usually, the first one they get, such as an
expected price or economic forecast.
• Unlike the conservatism bias, which has similar effects but is based on how
investors relate new information to old information, anchoring occurs when an
individual makes new decisions based on the old, anchor number.
• Giving new information thorough consideration to determine its impact on the
original forecast or opinion might help mitigate the effects of anchoring and
adjustment, but the characteristics of the decision-maker are as important as
conscious consideration.
• The problem with anchoring and adjustment is that if the value of the initial
anchor is not the true value, then all subsequent adjustments will be
systematically biased toward the anchor and away from the true value. However,
if the anchor is close to the true value then there is essentially no problem.
 Issues with adjustments
• One of the issues with adjustments is that they may be influenced
by irrelevant information that the individual may be thinking about
and drawing unfounded connections to the actual target value.
• For instance, suppose an individual is shown a random number,
then asked an unrelated question that seeks an answer in the form
of an estimated value or requires a mathematical equation to be
performed quickly.
• Even though the random number they were shown has nothing to
do with the answer sought, it might be taken as a visual cue and
become an anchor for their responses.
• Anchor values can be self-generated, be the output of a pricing
model or forecasting tool, or be suggested by an outside individual.
 Factor Influence anchoring
• Studies have shown that some factors can influence anchoring, but it is
difficult to avoid, even when people are made aware of it and
deliberately try to avoid it.
• In experimental studies, telling people about anchoring, cautioning
them that it can bias their judgment, and even offering them monetary
incentives to avoid anchoring can reduce, but not eliminate, the effect
of anchoring.
• Higher levels of experience and skill in a specific field can help reduce
the impact of anchoring in that subject area, and higher general
cognitive ability may reduce anchoring effects in general.
• Personality and emotion can also play a role. A depressed mood
increases anchoring, as do the personality traits of agreeableness,
conscientiousness, introversion, and openness.
 Anchoring and Adjustment in Business and
Finance
• In sales, price, and wage negotiations, anchoring and adjustment can be a
powerful tool.
• Studies have shown that setting an anchor at the outset of a negotiation can
have more effect on the final outcome than the intervening negotiation
process. Setting a deliberate starting point can affect the range of all
subsequent counteroffers.
• For example, a used car salesman (or any salesman) can offer a very high
price to start negotiations that are arguably well above the fair value.
Because the high price is an anchor, the final price will tend to be higher
than if the car salesman had offered a fair or low price to start.
• A similar technique may be applied in hiring negotiations when a hiring
manager or prospective hire proposes an initial salary. Either party may then
push the discussion to that starting point, hoping to reach an agreeable
amount that was derived from the anchor
 Application in Economic Forecasting
• In finance, the output of a pricing model or from an 
economic forecasting tool may become the anchor for an
analyst. One possible way to counteract this is to look at
multiple, diverse models or strands of evidence.
• Social psychology researcher Phillip Tetlock has found that
forecasters who make predictions based on many different
ideas or perspectives ("foxes") tend to make better
forecasts than those who focus on only a single model or a
few big ideas ("hedgehogs"). Considering several different
models and a range of different forecasts may make an
analyst’s work less vulnerable to anchoring effects.
 Application in Psychology
• The anchoring and adjustment heuristic is of great interest to psychologists
because it helps to explain a wide variety of different psychological phenomena.
• For example, people’s estimates of what other people are thinking are often
egocentrically biased (i.e., people assume that others think more similarly to how
they themselves think than is actually the case) because they tend to start with
their own thoughts and then adjust (insufficiently) for another person’s
perspective.
• People suffer from a hindsight bias, thinking that past outcomes were more
predictable at the time than they really were, because they anchor on current
knowledge and then adjust (insufficiently) for the fact that certain things that are
known now were not known back then.
• Also, people tend to assume that they will do better than others on easy tasks
because they start with an assumption that they will do well themselves and
then adjust (insufficiently) for the fact that other people are also likely to do
well on such easy tasks.
 KEY TAKEAWAYS
• Anchoring and adjustment is a cognitive heuristic where a person
starts off with an initial idea and adjusts their beliefs based on this
starting point.
• Anchoring and adjustment have been shown to produce erroneous
results when the initial anchor deviates from the true value. 
• Awareness of anchoring, monetary incentives, giving careful
consideration to a range of possible ideas, expertise, experience,
personality, and mood can all modify the effects of anchoring.  
• Anchoring can be used to advantage in sales and price negotiations
where setting an initial anchor can influence subsequent
negotiations in your favor.