Preconceptions; the Anchoring Trap [Archives:2002/32/Business & Economy]

The Road Ahead
BY RAIDAN A. AL-SAQQAF
[email protected]
Making decisions is a very important part of management. And it is very important to take careful measures when making one, as a bad decision could affect businesses negatively or even damage them. Yet sometimes, bad decisions are inevitable no matter how good a manager is or how well- studied the decision process was.
There are two theories as to how human beings form their decisions; one states that all behavior is learned; the individual is the passive recipient of external and objective data. In the other, learning is a process of gaining or changing insights, outlooks, expectations or thought patterns, this theory takes into account not only a persons actions and the responses to these elicit, but also the interpretation the individual places on these. In both schools of thought, experiences proved that there are certain thought traps which yield relatively wrong decisions. The following example explains one of these traps; imagine you were to answer these two questions:
-Does a new Helicopter cost more than $100.000?
-How much does a new Helicopter cost?
If these two questions where asked in the same order, the information in the first question will create a perception asking a persons mind about the price of the Helicopter, so when answering the second question the answer could get affected by the first one.
On the other hand, if you ask someone else the same question and change the number in the first question to $200.000 you will find that the answer will increase. This Process is called anchoring.
Anchoring is used a lot in businesses; for example sales forecast is done on the basis depending on sales of previous years, the old numbers become anchors which the forecasters use in adjusting the estimate for the coming year. Or while in negotiations, if the other party claims that the same product was sold for Mr. X for 10.000, that price becomes a your anchor.
Another example is in real estates. Imagine that there are two apartments; A & B. Apartment A has 3 rooms & Apartment B has 4 rooms. If the rent for apartment A was thirty thousands, what is the expected rent for apartment B? The price of A helps you in estimating the price of B.
Effects of anchoring in decision-making are critical, but if managers are aware of the phenomena, the negative impact of it can be reduced by using a few precautions; such as taking all prospectors when making a decision and careful use of anchoring with advisers, or consultants. Also it is important to be open-minded.
And in negotiations; think through your position in order to avoid any anchoring from the other party.
End note: Anchoring is a great perception-making tool; use it to your advantage

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