#7 Anchoring: Why we spend too much on BBQs

When we’re trying to determine the value of something, we tend to place far too much reliance on the first piece of information we stumble across. In this episode, Mel and Dan look at ways that pricing strategies influence our judgement, and how game shows make us feel like losers when we’re actually winning.

Dan: 00:18 Hey and welcome to Bad Decisions. The podcast that helps us understand why we choose what we choose.

Mel: 00:22 Why we think what we think.

Dan: 00:23 And how to exploit this stuff for fun and commercial gain.

We're your hosts. I'm Dan Monheit co-founder of Hardhat, a creative agency built for the digital age.

Mel: 00:31 And I'm Dr Mel Weinberg a performance psychologist. And cue music.

Dan: 00:41 Hey Mel, you're a psychologist right?

Mel: 00:46 I think so.

Dan: 00:46 Like a real one, yeah? You do consultations with people?

Mel: 00:49 Yeah.

Dan: 00:50 Okay, cool.

Mel: 00:54 Do you think that I don't? You want to check my registration?

Dan: 00:56 Okay, that's good. Can we do one of them now?

Mel: 00:57 Okay.

Dan: 00:58 I'm gonna tell you I'm mad, why I'm raging. I mainly hate TV, I mainly don't watch TV but, sometimes things happen and the TV is on and it just happens to catch my attention. Of all the types of TV I hate it's reality TV and game show TV that drives me the most crazy and leaves me with the least amount of faith in mankind.

Mel: 01:18 Stop right there, this isn't gonna work.

Dan: 01:19 What do you mean, why?

Mel: 01:22 In order for the therapeutic relationship to work you and I need to have a good rapport, feel like we're on the same page. I cannot be on the same page with you about this.

Dan: 01:29 What, you watch reality TV?

Mel: 01:31 Love reality TV, what else is there to watch?

Dan: 01:33 Aren't you a freaking doctor? Isn't it just beneath you?

Mel: 01:37 No, I typically think that when I spend all of my day using my brain when I come home I want to watch something that doesn't involve using my brain at all.

Dan: 01:46 So because I don't use my brain during the ... Are you suggesting?

Mel: 01:48 Just saying.

Dan: 01:50 Anyway, just go with me on this. So anyway I'm watching Deal or No Deal, this whole show could really be done in fifteen seconds. I don't know how they manage to drag this shit out for a full half hour. But what I just do not understand about this show, what was driving me absolutely crazy is you have these, basically losers. I mean, these guys are wearing polyester shirts. You have these guys who if you walked up to them before the show started and said " Hey buddy, how bout’ I just write you a check for ten thousand dollars right now, how would you feel about that? " They would take it, and these same idiots just because they're onstage and these weird metal briefcases and lights and music are saying no to guarantees of twenty grand, thirty grand, fifty grand. I just don't understand it. These people are idiots.

Mel: 02:40 So it sounds to me Dan that the reason that you dislike these sorts of game shows is actually the reason that I really do like them. Which is that they are all actually based on behavioural economics stuff. It's what we do! They make it fun! They gamify it.

Dan: 02:52 I'm not buying into this at all.

Mel: 02:52 You love it now. Basically what happens on Deal or No Deal, at least in the Australian version, which I assume is what you're watching. So you've got the chance to win two-hundred thousand dollars right? And that's what comes up in big flashing lights, two-hundred thousand dollars your only chance to win and like what you said the show is designed and situated in a way that introduces pressure, suspense, elements of risk, huge uncertainty right?

Dan: 03:18 Mild nausea for the audience.

Mel: 03:19 For some maybe, enjoyment for others. All that is in an attempt to push the contestant into making a decision that is emotional rather than rational. That's behavioural economics, that's what we do here. So all of a sudden for the guy you were talking about winning ten grand seems like you've lost. Because what they're doing is anchoring it against the grand prize of two-hundred thousand dollars. So when you compare it to the reference of two-hundred thousand dollars, ten grand seems like small change.

Dan: 03:50 Okay, you just said anchoring?

Mel: 03:53 Anchoring, anchoring is our heuristic of the episode. Welcome anchoring into the show.

Dan: 03:58 Alright, can we have some anchoring theme music Kops?

Dan: 04:14 That's much better Kops thank-you.

Mel: 04:16 Anchoring is the tendency for us to place disproportionate value on the first piece of information we are given when making a decision. Basically, whatever it is that we hear first, we use that as a reference point against which future information is considered. So anything that we hear after that doesn't get thought of independently of whatever comes before it. It's all based on whatever we've heard so far.

Dan: 04:38 Okay, so in this Deal or No Deal thing, they don't tell you that you could win zero dollars. They come out and say you could win two-hundred thousand dollars.

Mel: 04:47 Exactly, because they don't want to anchor the ten thousand dollars against the zero dollars. They're anchoring the ten thousand relative to the two hundred grand. So all of a sudden if you're getting ten thousand dollars you don't think you're getting a very good deal at all.

Dan: 04:58 And you might be inclined to say, " No deal. "

See I'm with you now. I guess we don't really talk about anchoring but this does make me think of two other techniques that people speak about. One is the age old low-balling technique where if somebody's trying to sell you something the first thing you do is give them an offensively low price. If somebody comes up to you and tries to sell you their car, twenty thousand dollar car, " Well if you throw in the tyres I'll maybe give you ten grand for it. " And then you've basically anchored them at ten grand and anything is assessed as relative to that.

Or there's the opposite of that which I guess is what we're afraid of, which is the door in the face technique.

Mel: 05:37 What's that?

Dan: 05:38 So the door in the face technique probably comes from the time of door to door salespeople. And it's the idea that when you give the first price to somebody you make it so eye wateringly high that the person you're trying to sell to basically slams the door in your face and tells you to piss off, but you've now set an anchor that these steak knives are going to cost a hundred and eighty dollars and when you end up selling them for a hundred and twenty or whatever it is the person buying thinks they've actually got a really good deal.

Mel: 06:05 You know what I've just realised?

Dan: 06:07 What's that?

Mel: 06:07 Not only do we work in different industries but our industries actually have their own different languages. It's amazing that we communicate at the level that we do. I say anchoring you say door in the face and we're all talking about the same thing. Potato Potatoe.

It's also making me think of all the times that I've actually been ripped off as a consumer.

Dan: 06:07 Yeah and are there a few?

Mel: 06:26 Yeah, because sometimes I go into situations and I really have no idea how much things cost. And I feel like this might have happened to me recently with a purchase of a BBQ that I bought. Hot Dogs at Mel’s, but that's a different thing. I just wanted something simple.

Dan: 06:43 I think BBQs are a great category for looking at these types of things because a BBQ is a thing that most people only buy once every, what, like when was your last BBQ purchase?

Mel: 06:52 I'm 34, that was my first.

Dan: 06:54 First BBQ purchase, so once every 34 years. So you walk into it basically susceptible to every type of behavioural economics heuristic possible because you have no idea what you're doing.

Mel: 07:03 And I'm blonde.

Dan: 07:03 And you're blonde.

Mel: 07:05 Adds a whole other element.

Dan: 07:06 Does it?

Mel: 07:06 To the sales process, yeah.

Dan: 07:08 Maybe we'll get a BBQ sales person on next episode and see if there is any truth in that.

Okay, so you're gonna go buy a BBQ and what happened?

Mel: 07:15 I walk in and there's a whole bunch of BBQs there and what's the first one that I see? The biggest shiniest BBQ that's out on display.

Dan: 07:23 The Beef-Eater twelve thousand?

Mel: 07:25 Five thousand dollars.

Dan: 07:26 Five thousand dollars for a BBQ?

Mel: 07:28 Right? I'm not making BBQs for a whole family alright.

Dan: 07:33 You don't strike me as a five thousand dollar BBQ buyer.

Mel: 07:35 Do I look like the sort of person who would spend five thousand dollars on a BBQ?

Dan: 07:37 Nah, I'm gonna be real here. No you do not.

Mel: 07:39 I basically said, no thank you not interested. Did not want to spend that amount of money. See ya later, I'm out.

But I did buy a BBQ.

Dan: 07:48 You did buy a BBQ? So you didn't “see ya later I'm out. I'm out of this aisle and going into the next aisle where I will purchase a BBQ”, for how much?

Mel: 07:56 I feel like I slammed the door in the guys face, but I don't think it hit him.

Dan: 08:01 Okay, what did you end up buying?

Mel: 08:03 Well, since you asked. I paid six hundred and ninety-nine dollars.

What are you doing? But I got a trolley and a BBQ cover thrown in.

Dan: 08:13 What?! Oh you got a cover thrown in.  That's gotta be worth at least four bucks on Ebay!

You spent seven hundred dollars on a BBQ?

Mel: 08:21 Why do I feel like you're taking the piss?

Dan: 08:21 What's your cost per use going to be? How many steaks are you gonna cook on that Mel - Sorry Dr Mel?

Okay, let’s be real though. If I had told you at the start of the day that you were going to go and spend seven hundred dollars on a BBQ, but you would get a free trolley and cover with it, you reckon you would've been cool with that?

Mel: 08:38 You're making me feel silly.

Dan: 08:39 Not silly, but let me tell you something. Girl, you got anchored. You got anchored bad.

Mel: 08:46 This is why I need you!

Dan: 08:47 You got anchored bad.

Mel: 08:48 Oh god. What do I ... okay.

Dan: 08:51 But hey, it happened to the best of us. At least they didn't put the BBQ in a bag that you then carried around that told everybody that you got anchored badly.

Mel: 09:01 Wearing it on my forehead?

Dan: 09:02 Because apparently this happens in some markets overseas, like you go travelling in Asia. Particularly I heard about this happening in Thailand where you go to a market and you bargain hard in there. Sorry, this is a complete side note by the way. And you go and bargain for headphones or whatever it is you're buying, you eventually get to a price, you give them the money they put the thing you've brought, whatever it is, headphones, DVD, I dunno do people still buy DVDs? I dunno, into a bag.

But apparently, there's different bags that mean different things so if its in a black bag it means that you're a really hard negotiator. If they put it in a white bag it's like you're a really bad negotiator and if they put it in black and white stripy bag it might mean you're somewhere in the middle. So you're basically walking around the market with a sign telling every other vendor how they're meant to anchor you.

Mel: 09:48 They've got some secret language going on as well?

Dan: 09:50 It's not even that secret. You're literally like walking around with a flashing sign that says “can't negotiate for shit, start high.”

Mel: 09:55 “This persons an idiot, charge them as much as you want.”

Dan: 09:57 See so we're all susceptible, it happens. Anyway, that may or may not be true but if it is true it's a great story and if it's not it's still a great story it's just not true.

Another place where we see anchoring come to life is on wine menus. I feel like honestly we could do a whole episode on wine menus and restaurant menus. We could do a lot of restaurant examples. But, on wine menus normally, the highest volume selling wine on a wine menu is the second most expensive wine because customers will look at the list. They'll see the most expensive, they'll get anchored to that. They're like " I'm not crazy, I'm not Mel buying a five thousand dollar BBQ. I'm going to be a bit more reserved - "

Oh don't be sad.

" - and I'm going to buy the second most expensive wine. " And a lot of restaurants knowing this will therefore make their second most expensive wine on the menu the wine that they make the best margin on. Sneaky sneaky.

Mel: 10:46 So the thing about this and the interesting thing about anchoring is that the research has shown that the anchor value doesn't even have to have anything at all to do with the product.

So we talked at the start about Deal or No Deal and we were talking in terms of currency and we've talked with the BBQs as well. But, what the research shows - cue music -

Dan: 11:03 I think we're getting over produced. Has this show jumped the shark?

Mel: 11:13 The research shows that the anchor value doesn't even have to have anything to do with the product, so for example, Tversky and Kahneman. It's as if we've just read one paper by Tversky and Kahneman and we're just citing it. But this one does come from their popular piece in science from 1974.

Dan: 11:30 Oh I read that, cover to cover.

Mel: 11:32 Hasn't everyone?

And what they did was have participants watch a spin of a roulette wheel. And it was rigged to either stop at number ten or number sixty-five, so it wasn't like your standard roulette game zero to thirty-six or whatever it is.

Dan: 11:32 Yeah that's weird.

Mel: 11:45 You wouldn't want to be betting on it. Wheel's rigged so you're either going to land at number ten or number sixty-five and what they then did was ask people to guess the percentage of United Nation countries that were African countries.

Dan: 11:56 Who doesn't know that?

Mel: 11:57 I mean look, nobody has any idea.

What happened was, for people who saw the wheel -

Dan: 12:02 Sorry to our African listeners. I'm gonna take it upon myself to know the answer to this by next episode.

Mel: 12:08 For people who saw the wheel land on number ten, their estimates were about twenty-five percent on average. But, for people who saw the wheel land on sixty-five their guesses where about forty-five percent.

Dan: 12:21 This makes no sense at all.

Mel: 12:22 It's like we get primed to think in reference to the latest number that we heard.

Dan: 12:25 Even if the number has absolutely nothing to do with the question?

Mel: 12:28 That's what the research shows.

Dan: 12:29 It's like we're so stupid, we're so clueless, we're in a new situation and we literally have no idea what the answer is.

We're like "brain, what's the percentage of African countries in the United Nations?" And my brains like "uh I dunno." "The answer should be a number, are there any other numbers you can tell me?" And it just literally just grabs the closest number and says "there you go, try this." Like sixty-five, that sounds a bit much let’s go with forty-five.

Mel: 12:54 Anchoring in a nutshell.

Dan: 12:54 That's literally what happens.

Mel: 12:55 That's it.

Dan: 12:56 You know every episode we do I just realise how stupid we are as a species.

Mel: 13:01 We are but it's the whole point of what we are trying to do here is actually give people the information so that they can then use to then improve the way that they understand what's going on and the way that they make decisions.

Dan: 13:12 Yeah, and sell more stuff. Shall we get to that bit?

Mel: 13:15 Yeah.

Dan: 13:15 Okay, so I think there's a few really cool ways that we can use this. So the first one we could talk about is any negotiating situation and the conventional wisdom if you're going into a salary negotiation or whatever. Buying a house or whatever it is, there's always this idea that you want the other person to go first. Whoever says the number first, loses.

Mel: 13:37 But it's also nice, a nice thing to do sometimes to give the other person.

Dan: 13:40 But also awkward, you know it’s awkward. I think off the back of today's episode we can see there's gonna be an anchor set. Someone's gonna say something first and then all the other negotiations are going to take place as a result of that anchor.

Mel: 13:54 I think I get what you're going to.

Dan: 13:56 If someone’s going to set an anchor: I vote me.

Mel: 13:59 I get this now. Why I such a negotiating. It's because I'm too nice.

Dan: 14:03 Too nice, yeah. You've just got to come in and make an obscene demand. You've got to slam the door in someone’s face with your demand. Your rates for doing this podcast are going to go up significantly. What's four times zero?

Definitely for any negotiating situation go in hard, go in strong, you set the anchor and let everybody else work around you.

Mel: 14:26 It also helps in terms of getting a sense of control over the situation. Because like we've said somebody's gonna set an anchor, if you leave it up to the other person, you're playing their game from there. So negotiations from somebody who's not good at negotiations. I've learnt my lesson.

Dan: 14:41 Definitely take advice from Mel about negotiating.

Mel: 14:44 Set the anchor first, got it.

What else from a marketing perspective?

Dan: 14:47 Supermarkets do all sorts of wacky stuff with pricing and bundling and things like that and anchoring can play a really big role in how many of a product people will purchase.

There's been some really interesting studies that looked at advertising rolls of paper and when you look at things like four rolls of paper for two dollars or fifty cents a roll a significantly higher proportion of people will pick up the four rolls for two dollars even though you can buy them as individuals. Because, people have been anchored to think that four is the correct number of rolls of paper that you clearly need whoever you are and whatever house you happen to live in.

Mel: 15:22 Okay so I think I've seen some research similar to that and it involved a supermarket selling Campbell soup. They have cans of soup but they were on sale for seventy-nine cents.

Dan: 15:22 That's a good deal.

Mel: 15:32 Yeah, you'd think. What happens is they have shoppers go into the supermarket. They go through the soups, they see Campbells soup’s on sale for seventy-nine cents and people were purchasing an average of 3.3 cans of soup. Great.

Dan: 15:45 I've never bought a third of a can of soup.

Mel: 15:47 It's an average so take in average numbers.

Dan: 15:49 You do your fancy math stuff and come back to me.

Mel: 15:52 They were buying on average three or four cans of soup, you happy?

Then what they did was they put a sign up and the sign said there's a limit of twelve cans of soup per customer. All of a sudden what have they done? They've set an anchor.

Dan: 16:06 They're anchoring people at twelve. Yep.

Mel: 16:07 And what they found was that when that sign was up shoppers purchased an average of seven cans of soup.

Dan: 16:13 Seven, up from three and a third?

Mel: 16:15 Up from three and a third, so they got anchored too.

Dan: 16:18 I love the visual of just watching somebody trying to pick up seven cans of soup at the same time. Just go dropping them everywhere.

Mel: 16:25 And we've talked about anchoring but what it's also introducing is a little bit of a social proof which we've talked about in a previous episode where when you see that sign, limit twelve per customer, you automatically think everybody is buying this soup. This is popular soup. You're getting sold to both the social proof and the anchoring bias.

Two for one.

Alright time to wrap this up.

Dan: 16:47 Two for one heuristics with a free trolley and cover!

Mel: 16:50 Time to wrap this up speaking of covers.

Dan: 16:52 Okay, let’s wrap it up.

Mel: 16:53 Basically, anchoring whatever the first piece of information is we see we're gonna place disproportionate value on it. So beware of the first numbers that you're exposing your customer to.

Dan: 17:03 And I guess that means as a brand we've got to acknowledge that most of the time some sort of anchor is already going to exist so we gotta decide where do we want to play relative to the market anchor. Do we want to come in super premium? Do we want to come in super cheap? Do we want to chip in around the edges? But acknowledge that there is already likely an anchor that our customers are working around. And on the off chance that there is not already an anchor don't be afraid to go out an aggressively set one. As people like Apple always do.

Mel: 17:31 Cool so that brings us to the end of this episode and as always if you have any questions or any comments for us you can get us on social media. I'm @DrMelW Twitter, Instagram, LinkedIn, wherever.

Dan: 17:44 Myspace? IRC?

Mel: 17:46 Oh god.

Dan: 17:47 And I'm @DanMonheit you can get me Instagram, Twitter, Facebook, Google.

Mel: 17:56 And please join us next time where I will tell you about more of my bad purchasing decisions and I will get Dan to maybe talk about some more reality TV shows.

Dan: 18:05 Hey, can we do an on air steak testing from your new BBQ?

Mel: 18:08 I thought you were going to ask if we could talk about the Kardashians next time.

Dan: 18:09 We are not talking about the Kardashians, never ever ever talking about the Kardashians.

Mel: 18:14 We'll talk about them one day.