The Concept of Anchoring Bias in EconomicsReading passageAnchoring bias is a cognitive bias that 💬 (1)

Understanding Anchoring Bias

Anchoring bias influences individuals' decision-making processes. It occurs when people rely too heavily on the first piece of information they encounter (the "anchor") when making decisions. This initial data point serves as a reference, affecting subsequent judgments and estimations.

For example, if someone is told the price of a product is $100, they may perceive a discount to $80 as a better deal, even if the item's actual value is much lower. Anchoring bias can impact various economic decisions, from consumer purchases to financial investments, by skewing perceptions of value and cost.

Examples of Anchoring Bias

Imagine you're shopping for a car, and the first price you see is $20,000. Now, even if you later find a similar car for $18,000, that initial price of $20,000 will still influence your perception. You might feel like you're getting a great bargain, even if the car's real market value is lower. That's anchoring bias in action.

Another example is in salary negotiations. Suppose you're applying for a job, and the first salary figure mentioned is $50,000. Even if you think you deserve more, that initial number will likely anchor your expectations and possibly the final offer. These examples show how initial information can shape our decisions and perceptions, often without us even realizing it.

Conclusion on Anchoring Bias

In summary, anchoring bias is when people use the first piece of information they get as a reference for making decisions. It affects how we view prices and costs. The professor's examples illustrate this concept effectively: first, when buying a car, if the first price you see is $20,000, it affects how you see other prices, like $18,000. You might think $18,000 is a great deal, even if it's not. Second, in salary negotiations, if you hear $50,000 first, it can set your expectations and influence your final salary. Thus, anchoring bias shows how initial information can change our decisions without us knowing.