Research Report

Behavioural Economics A9481-3005/Sini

Setälä<Teacher's Last Name>
Tam Nguyen ID:2210338 20.02.2023
Ruth Songok ID:2108884

The role of anchoring bias in decision making:

IQ and EQ perspective
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Table of Contents

1 Introduction ................................................................................................................. 3
2 Why we chose anchoring bias .......................................................................................... 2
2.1 The Theoritical Anchoring Effect ............................................................................ 2
2.1.1 The Empirical Anchoring Effect ...................................................................... 4
2.1.2 How it is connnected to business .................................................................... 2
2.2 How it is connected to business .............................................................................. 8
3 How anchoring bias manifest itself ................................................................................... 9
Conclusion........................................................................................................................ 10
References ....................................................................................................................... 10
Figures ............................................................................................................................ 12
Tables ............................................................................................................................. 12
Appendices ....................................................................................................................... 13

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1 Introduction Do not delete this Section Break.

Cognitive skills are the set of abilities that helps an individual to process tasks or
assessments. The brain receives and processes information in different mechanisms
such as memory, learning or decision making. However, sometimes this process can
be biased as the brain simplifies the information and processes it only through per-
sonal experience or vague sources of information. This results in different faulti-
ness’s such as reality distortion or incorrect judgment. This report will specifically
review theories and analyse one of the bias types of the brain in the process of
making decisions: Anchoring bias. To understand the concept of anchoring bias, we
will first review the definition of this bias in theory and in empiricism. This
knowledge will be investigated in the real-life cases of business and how it works
as a behavioural reaction. Then we will conclude the report by commenting on the
relationship between anchoring bias and economics and daily life

2 Why we chose anchoring bias.

The fact that anchoring bias is related to the decision-making process we are prone to win-
dow shopping most of the time and has affected quite often. When we see a discounted
product, we always tend to make an educated guess that the product must be valuable in
which we end up buying it. The discounted price estimation internally influences our need to
have the product, just like our buying power is compromised and influenced by the dis-
counted price. Anchoring bias has affected us to make quick decisions while at work or during
studies. Especially, reading abstract texts which aid in knowing if the academic paper is val-
uable or not towards an area. Similarly, anchoring bias has been more relevant when it
comes to making quick decisions precisely when purchasing and we are in a hurry to do
some other chores.

2.1 The Theoretical Anchoring Effect

The base knowledge of cognitive bias was constructed by the two influenced psychologists
Daniel Kahneman and Amos Tversky in the 1970s. Their idea stated that decisions and
predictions are mainly made based on illogical evidence coming from personal understand-
ing and beliefs. In their published paper in 1974 called “Judgment under Uncertainty: Heu-
ristics and Biases” Tversky and Kahneman mentioned anchoring bias is one of the ele-
ments involved in the process of decision making under uncertainty. Usually, this happens
when there is an element of figure or value involved in. In the case of anchoring, numerical
predictions can be greatly effective and economical, but it can also result in systematic er-
rors if there is lack of intention to additional information, as reality can be easily manipu-
lated by irrelevant pieces of information.

As anchoring involves a starting point, different initials can lead to different estimates and
decisions, which is highly biased to the original value. By setting the initial information is
giving a strong anchor effect to the receivers. In the same paper, the two psychologists
stated that anchoring effects can be formed from two sources: Given by the problem or an
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incomplete computation. This is noted that in both ways, the information is highly insuffi-
cient.
This theory was proven by many empirical experiments. Following these experiments,
many other tests have been done to evaluate the relationship between cognitive biases
and behavioural economics. In this report, we will review various experiments ranging from
simple to complex to see the role of anchoring effect in different cases and how it is con-
nected to business.

2.1.1 The Empirical Anchoring Effect

Tversky and Kahneman did two noticeable experiments to demonstrate the anchoring ef-
fects. The first experiment was to prove that the effect is caused by the problem and the
second experiment was to prove that the effect is caused by partial calculation.
In the first experiment, the initial was determined by spinning the wheel between 0 - 100,
the participants were asked to estimate the percentage of African countries in the United
Nations. According to the result of the article, the groups that received number 10 and 65
from the wheel, gave the percentage of 25 and 45 respectively to the same question. This
shows an anchoring effect greatly affecting the mean estimates of the groups since the an-
swers tend to be close to the initial settings. Additionally, the initial was drawn from a spin-
ning wheel, this is highly insufficient and irrelevant to the problem which was given.

In the second experiment, a math problem was given to the participants, and they were
asked to answer in a time limit of 5 seconds. However, the math problem was written in dif-
ferent ways to the different groups.

To group A, the math was written:

1x2x3x4x5x6x7x8x9
To group B, the math was written reversely:
9x8x7x6x5x4x3x2x1

To promptly answer this problem, people tend to perform only a few steps of calculation of
the first few figures then estimate the answer. Due to the anchoring effect, the estimates of
the two groups were greatly different. Group A and group B gave the mean estimates at
512 and 2250 respectively. This is because the descending sequence starts with a higher
number compared to ascending sequence, so group B gives a higher number than group
A. However, none of these answers is close to the correct answer, which is 40 320. This
experiment shows that the initial point affects the estimation of the groups. Additionally,
with such insufficient information, the effect leads to underestimation.

2.1.1 How it is connected to business

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These practices show that anchoring can interfere into the decision-making process, and it
affects the results. In other terms, business usually has the anchoring characteristic as it
has many events, numerical problems, and pre-existing knowledge. As explained above,
the anchoring effect leads to underestimation or overestimation to a solution, so it directly
affects the result. To understand better how it can be applied to real life cases, we should
understand the mechanism of anchoring in manipulating the result. Then how anchoring
affects people's behaviours in purchasing or selling products.

Firstly, there are elements that affect the results to be underestimated or and overesti-
mated due to anchoring bias. Other tests were designed to explore the phenomenal so it
can be understood more in practical events. In the result, Tversky and Kahneman (1974)
concluded “People tend to overestimate the probability of conjunctive events and underesti-
mate the probability of disjunctive events.” This can be shown clearly in planning of busi-
ness. To successfully produce a product, a series of actions need to be done successfully
which has a characteristic of conjunctive events. The successful rate for each task is low
and different while the number of tasks is large, which increases the rate of failure. How-
ever, due to the overestimation of conjunction events, unwarranted optimism is a typical
reaction in this kind of plan. In the same principle, the evaluation of risk assessment has
the character of a disjunctive event. Although the chance of failure is small but there are
many tasks, it will greatly affect the outcome. In short, anchoring effect direction is affected
by the structure of the event. The psychologists confirmed that the chain-like structure of
conjunction will result in overestimation and the funnel-like structure of disjunction will result
in underestimation.

In 2010, Oscar Bergman et al. confirmed that anchoring effects can directly affect the will-
ingness of goods purchase decisions by replicating the experiment of Ariely et al. (2003). It
is studied that there is a strong correlation between cognitive skill and anchoring bias. To
prove this theory, they have run Cognitive ability test (CAT) and Cognitive reflective test
(CRT), which were designed by Swedish psychometric company Assessio (Sjöberg et al.
2006) and Frederick (2005) respectively so that it can be differentiate different group of par-
ticipants based on there cognitive skill level.

Different groups were tested on the willingness to pay for different types of goods by
providing an irrelevant anchor which is the last two digits of their social security number.
Table 1 displays the result of the test and the correlation between the element.
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According to Table 1, there is a strong correlation of about 0.37 between the willingness to
pay for the goods and the initial starting point that is given to the participants. Oscar, B.
confirmed that this result is like the test Ariely et al. (2003).
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Table 2 shows the relationship of CAT/CRT tests and anchoring on the same groups of
participants. There are positive differences between low and high groups. This means the
correlation is less for higher groups in both tests, proving that anchoring effect decreases
for people with high cognitive skills. However, the affected rate of anchoring is still available
for groups with high cognitive skills. Oscar Bergman et al., also mentioned that CAT is
more suitable for testing anchoring effects than CRT as its structure has more questions
and information to indicate anchoring. This explains the differences in CRT can be negative
or small compared to CAT tests. To summarize, there is a correlation between anchoring
effect and our cognitive skill. This confirms that anchoring interferes differently for people
with different cognitive skills, the effect is decreased for higher groups of cognitive skill

According to the American Journal of Social and Management Science (2010), the anchor-
ing effect happens when there is pre-existed information available. Northcraft and Neale
(1987) showed that the real estate price estimate is highly biased toward the given anchor
point which is a pricing booklet. In another study, Gruen and Gizycki (1993) used anchoring
bias to explain the “sticky price” phenomenon. It is stated that the new price is suggested
from the past price, and it tends to be close to the old value. The vaguer the value of the
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goods the higher the anchoring bias toward the price determination. Galinsky and Muss-
weiler (2001) examined the role of anchoring in seller and buyer behaviors and showed
that the offer point will greatly affect the negotiation. So, there is an advantage to whoever
makes the first offer: the initial point. In another example, Beggs and Graddy (2009) docu-
mented that artworks are sold higher in the high-class market since the buyers are an-
chored to the price of the previous pieces. To sum up, anchoring bias in economics is stud-
ied by documenting the cases and predicting its potential applications. However, there is
not yet any solid conclusion about the effect of anchoring bias to the pre-existing people's
knowledge in a circumstance in economics.

2.2 How to notice anchoring bias

One can be affected by anchoring bias unknowingly during the decision-making process.
Sometimes it can be even a challenge to notice you have fallen in the trap of an anchored
bias, mostly by relyIng too much on pre-existing information of a product and or even the first
information obtained while deciding. People tend to remember better the things learned ini-
tially then what is learned later (Stewart et al.,2004). The ability to remember the initial value
would be even more important than the information that follows without your realization.

A person’s mood can reflect anchoring bias. It is believed that sad people are more prone to
anchoring bias than the people who are in neutral moods (Bodenhausen et al.,2000). If peo-
ple’s ability to think harder is inhibited by cognitive load, their adjustment process tends to
be more inadequate due to ceasing to adjust soon after reaching a satisfactory value (Epley
and Gilovich., 2006). Estrada, Isen and Young (1997) demonstrated that physicians being
induced with positive moods were less capable of being affected by anchoring bias compared
to those in neutral moods. Sadness is indicated by detail-oriented information processing
strategies (Forgas,1995; Schwarz, 1998; Sinclair & Marks, 1992) and positive moods lead to
higher creativity and production of high thorough and efficient processing sometimes
(Isen,2008). Happiness is characterized by appraisals of high certainty, and sadness is indi-
cated by low certainty (Tiedens & Linton, 2001).

Personality of an individual can show anchoring bias. People tend to rely mostly on initial
information than the new information which can be avoided by considering new information
thoughtfully and thoroughly. Personality is one of the individual difference variables that af-
fects individuals ‘performance and more specifically the cognitive processing in decision
making (Furnham & Boo,2011). Research in the field related to personality focused on the
most widely tested and well-regarded Big-Five personality traits (Eroglu Croxton, 2010;
McElroy &Dowd, 2007). The Big-Five factors according to Barrick and Mount (1991) are,
Extraversion, agreeableness, conscientiousness, emotional stability/neuroticism, and open-
ness to experience.

Extraversion personality trait portrays one to be sociable, assertive, talkative, and active.
Bower`s (1981,1991) theory suggests that positive moods have more positive judgments and
vice-versa. Research shows that the relationship between mood state and the anchoring
effect have demonstrated that negative lead participants engage in more effortful information
processing that is more prone to anchoring effect (Bodenhausen et al., 2000) . This simply
means that, high level of extraversion reduces susceptibility to the anchoring effect.
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Emotional stability trait on the other hand, reflects calm, even-tempered, and less tense while
Neuroticism reflects being depressed, tense, nervous, angry, unstable, discounted, worried
and uneasy. No empirical evidence found on the relationship between the trait and the an-
choring effect (Furnham & Boo, 2011). Hence, a high level of emotional stability reduces
susceptibility to the anchoring effect.

Agreeableness trait indicates being courteous, flexible, trusting, co-operative and tolerant;
conscientiousness trait is being careful, responsible, and organized; and openness to expe-
rience trait is being imaginative, curious, original, and open-minded are considered together
during the hypothesis.

A high level of agreeableness increases susceptibility to the anchoring effect.

A high level of conscientiousness increases susceptibility to the anchoring effect.

A high level of openness to experience increases susceptibility to the anchoring effect

3 How anchoring bias manifest, itself

Anchoring can manifest itself in the medical field. The most recent example is the COVID-19
pandemic. During covid, diagnosis was made majorly based on the initial symptoms experi-
enced by the patients and less on subsequent symptoms. Doctors depended mostly on the
initial information and less on additional information which led to misdiagnosis. Research
done in 2020 showed that doctors were prone to use anchoring bias during diagnosis of
COVID-19 patients and may fail to give proper diagnosis to the same patients in future
(Yousaf et al.,2020).

Anchoring bias can be seen in product labeling and has been argued that product label is a
quality signal for the customer. For example, organic food labels in the store will help the
customers with the conventional products from the organic ones. Brunso, Fjord and
Grunert(2002), and Zanoli and Naspetti (200) showed that consumers relate organic food
to perceived good quality.

Conclusion

In conclusion, anchoring bias interferes greatly in the process of decision making when
there is an availability of initial points. The effectiveness of this bias depends on the individ-
ual cognitive skill level, emotional states, and personalities. Therefore, anchoring bias is
varied due to these factors and the brain will use different channels to process the infor-
mation. We also noticed that anchoring effects might cause problems in some cases such
as medicals or misconception in products which is highly concerning since it affects health
and life qualities. Generally, anchoring bias helps with quick adjustment but time and refer-
ences need to be considered to give a better answer.

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Schwarz, N., Bless, H., & Bohner, G. (1991). Mood and persuasion: Affective states

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Figures

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Tables

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Appendices

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Appendix 1: First appendix