Anchoring and Price

The Israeli American psychologist Dan Ariely has done extensive research on the psychology of pricing, that is to say, people’s behaviors with regards to the prices of goods and services we encounter. He interest in price psychology was piqued when he first visited a pricey chocolate store. There he had before him an array of incredibly delectable truffles with equally incredible prices.

“I was thinking about what I wanted,” he said, “and I realized two things. One was that I quickly adapted to the level of prices. I didn’t think about how much chocolate costs in the supermarket.” The other thing was that “I was very susceptible–willing to take whatever suggested price the store was going to tell me was the right price to think about.”(Ariely, 2009)

Later Ariely became a professor of behavioral economics at Duke University. He is responsible for some of the most compelling demonstrations of how fluid prices really are.

One experiment that Ariely collaborated on was a silent auction of quality chocolates, bottles of wine, and computer equipment. The bidders, prospective MBA candidates at MIT’s Sloan School of Business, were asked to write down the last two digits of their social security numbers (To serve as an anchor). Each bidder then had to choose whether he would pay more or less that that two digit number, in dollars, for each item being auctioned. Finally, bidders wrote how much they were willing to pay for the item (an actual reserve price). Winners paid with their own money and got to keep any items won. One of the auctioned items was a bottle of 1998 Cotes du Rhone. So as an example, my social security number ends in 78, so the first question I would have to answer is “Would you pay more or less than $78 for this bottle of wine?” The second question then is “How much are you willing to pay?”

As was expected, the results from the experiment showed very clear anchoring (I should clarify that anchoring is the influence of perceptions by an unrelated stimulus, in this case, random social security numbers). Bidders that had “low” SSNs (defined for the experiment as those ending in the digits 00 through 19) were willing to pay an average of $8.64 for the bottle of Cotes du Rhone. Bidders with “high” SSNs (ending 80 through 99) were willing to pay $27.91 for the exact same bottle of wine! The same phenomenon occurred with the chocolates and the computer equipment. When all the experiment data was plotted on a graph (price one was willing to pay versus ending SSN digits), the results are astonishing. The price bidders were willing to pay for each and every one of the items went up in lock step with their ending SSN digits!

I’ll leave the implications of this up to you.

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