The way we think and how we perceive an information has a powerful impact on our decisions. Generally, for any situation in life, we have two options to choose and the first option information we receive, we use it as a reference while making life decisions (good or bad decisions). This is known as anchoring bias.
For better understanding let me give you an example of my cousin who is awaiting his master’s results and is seeking for a job opportunity. Out of the several companies, he applied to, one employer offered a managerial role with a salary of ₹2.5 lacs per annum. There was another as well where he applied and was hopeful to get through.
Two weeks later when we met he told me that the first company is offering him an entry level position, instead of a managerial position, with a salary of ₹1.9 lacs per annum. He seemed upset about it as he was expecting a ₹2.5 lacs per annum. Now he stated that he eagerly waiting for a reply from the second employer. We were discussing his options as he was anchored to ₹2.5 lacs per annum, as he was being offered less. I reminded him about the job location, growth prospects and ultimately his happiness and accept the entry level position.
Two days later he called me to inform about his decision. There was cheerfulness when he told me that he will join the first company. I was surprised as I thought that the second company would offer him something bigger and better. But the second company offered ₹1.5 lacs per annum, ₹40,000 less than the first company. Now again, his anchoring point had changed, its now ₹1.9 lacs per annum.
From the example, it is seen how anchoring bias changed and with the change in anchor he was happy with the decision. That is because he could still live at home, save a ton of money, and get out of debt in no time. Since his anchoring point changed (he was now anchored to ₹1.9 lacs per annum) when another offer that came in was less, he was happy with the first offer.
Anchoring bias has tremendous effect in our lives in ways we are not aware of. We get anchored to stock returns, salaries, and many other financial and non-financial aspects of life. It is important to understand that what will serve as an anchor to help us in our decisions and what are just acting to derail our decision making. You should know that to what you are susceptible to this perceptive bias and where is the reference point, the original thing to which we’re anchored. From there, you consider other factors, as what will make you happy, how will choosing option A over B will affect my future, my family, and goals.
If you have your life goals set and are working towards it, then anchoring just helps you in making better decisions. Anchoring is an integral part in our life as every situation is a total of trade-offs and the choices are anchored.