How Anchoring Affects Your Spending Decisions

how anchoring affects spending decision

Ever made a decision and then wanted to kick yourself in the butt? You’re in good company. It seems that when it comes to making decisions, we only look like we’ve thought it through. So much depends on our “cognitive biases”: the short-cuts we take to help us make decisions quickly.

One of the most influential biases is called “anchoring.” Anchoring is our tendency to depend on the first piece of information we received when making a decision.

If you look at an item on sale, and see the original price crossed out and a new sale price, you think you’re getting a deal even though the exact same item may sell for a lower regular price in another store. Rather than shop around, do your research, become informed, you are anchored to the original price shown and pay more than you need to because you’re getting “a deal.”

Most of us fall into the anchoring trap at one time or another. Sometimes it’s the price of an item: Just listen to your elders when they talk about how expensive everything is getting; they’re anchored at lower prices. When people buy more expensive wine because they believe that if they pay more they’ll get a better quality of wine, they’re anchored. And sometimes we are anchored by our priorities: if all you care about is low mileage when you’re buying a second-hand car, you may look no further than odometer readings when shopping.

You can become anchored to all kinds of things. If your last job paid $18 per hour, but you had to change locations because you’ve moved, when you’re offered $16.50 per hour for a similar position, you might balk because you’re anchored to your previously higher wage. If your curfew growing up was 11 p.m., guess when you’ll most likely set your kid’s curfew? And if the first time you went to a concert you paid $30 for the ticket, having to shell out $200 for a concert ticket ten years later may be more than you can bear.

Anchoring can work for you by helping you to make decisions quickly. But it can also work against you. Let’s say you walk into a bank. You’ve just bounced a cheque and the customer service person tells you the easy way to prevent that from happening again is to get overdraft protection. She says it’s cheaper than having more bounced cheques.

Makes sense, right? Sure. Overdraft protection is a great way to eliminate NSFs and protect your credit score. But hang on a sec. Suppose I told you that the best way to avoid the cost of NSF cheques would be to use a spending journal and never write a cheque for which you didn’t already have the money in the bank?

If your first thought is, “Overdraft is easier,” you may be lazy, or you may simply be anchored to the first bit of information you got on the subject.

Overdraft doesn’t come cheap. There’s a reason why banks encourage their customers to sign up: banks make lots of money from overdraft protection. And, overdraft is just another form of debt, so really, you’re just stacking your debt pile higher and higher. If you sign up for overdraft and then, because you don’t actively manage your money, end up sitting in overdraft for weeks or even months at a time, you’re working to make the bank richer and anchoring has worked against you.

The best way to avoid anchoring is to:

  • Avoid being pressured into making a decision quickly,
  • Take the time to think carefully about what you’re doing, as opposed to going with your first instinct, which is where anchoring lives,
  • Shop around so you develop some new anchors, and
  • Become an expert; since experts have more information, they are less likely to be anchored.

If you have the option of opening the negotiations – say when you’re asking for a raise or when you’re buying a big-ticket item – you can use anchoring to your advantage. If you’re not the first one off the block, be on guard. Just because you now know what anchoring is and how it works doesn’t mean you’re no longer susceptible. It just means, if you’re smart, you’ll be watching for what’s anchoring you.

Category: Budgeting | Tagged in:

Apr 5, 2018

About Gail Vaz-Oxlade

Gail Vaz-Oxlade is the Gemini-award winning host of Til Debt Do U$ Part, Prince$ and Money Moron. She hosts The Monday Night Late Shift on NewsTalk1010 where she talks about life, the universe & everything. Gail blogs daily at gailvazoxlade.com and contributes to moneyproblems.ca. Gail is determined to eliminate financial illiteracy in Canada, and encourages people to join MyMoneyMyChoices.com to raise their Money IQ. Her books include: Debt-Free Forever, Easy Money, Never Too Late, Money-Smart Kids, It’s Your Money, Money Rules and Saving for School. You can also follow her on twitter @GailVazOxlade.

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