Tag Archives: Daniel Kahnemann

Anchors Away!

Anchor

The minute you are exposed to a piece of information, the price of a product for example, you are very likely to base your future thinking on that price. Your thinking becomes anchored to what you now know, and as much as you may not like to admit it – there’s not much you can do about this.

The Anchoring Effect

In his book Thinking Fast and Slow, Daniel Kahnemann talks about the anchoring effect in a number of ways, here’s the essence of one I like:

Two groups of estate agents were asked to assess the value of a house after visiting it and reading some detailed sales blurb, which included an asking price. One group were shown a much larger asking price than the other, and all were asked what would be the lowest price they would be willing to sell the house assuming they owned it.  They were next asked what factors had influenced their decision making. The estate agents maintained that the asking price was not one of these factors, rather that they took pride in ignoring it.

The test results showed they were wrong, and that the anchoring effect (the ratio of the difference between the lower and higher groups of prices expressed as a percentage) was 41%. A group of business school students were also asked to carry out the same task, and whilst the anchoring effect percentage was similar at 48%, a key difference was that the students acknowledged the influence of the starting price on their thinking.

Working Without an Anchor

Earlier this week I was invited to pitch a product idea to a networking group and to get feedback on three things.  The things I chose were:

  • How do I promote this product?
  • How do I improve this product?
  • What is a fair price for the product?

The group listened to me talk for about three minutes and read 200 words of sales blurb I’d put together. They were then invited to scribble down ideas for the first two questions and put them on a wall where we could all read them. I invited everyone to remain silent on their answer to question three, and to write down their suggestion and hand it to me. Why did I do this?

Based on my understanding of the anchoring effect, I was concerned that once someone posted a price on the wall, other people would be influenced by it and indeed, may choose not to contribute an answer. They might have thought – well that’s close enough to what I was thinking so no point in adding to the mix. They might have thought – wow that price is nowhere near my idea I’ll keep quiet, don’t want to embarrass me or Doug. I’ve seen versions of this play out in numerous meetings where a more assertive member of the team will forever put their views forward first, and it dampens and biases the views of others. What I hoped to gain was an unfettered source of independent perspectives. How did we get on?

Suggested Product Prices

I received 18 responses, nearly everyone contributed. The range was considerable, from £25 to £1,500. Five responses landed at £200 and below, six at £500 and above. The average was £414. Clearly I can’t go back in time with this group and redo the test with an anchor price included, but if I could, then based on Kahnemann’s research I’m confident I wouldn’t have gained such useful, unvarnished feedback.

So why does this matter to you?

Well I guess that depends on whether you want to avoid the anchoring effect like I did in the example above, or, put it to another use, perhaps like Chris Brogan does via this interesting blog post written by my smart friend, Paul Hebert. Either way – I think it’s important you are aware of it so that next time you are looking for feedback on an idea or you’re positioning something, you do so a) with the knowledge that you are applying an anchor, or not, and therefore b) that you are aware of the likely bias in the responses you get.

Kudos to my friend Vandy Massey, who suggested the idea to me of working without an anchor.

photo credit

On Parole

The Prisoner - On Parole

The reminder goes off on your electronic calendar, buzzing like a tiny wasp in a jar. You check your crackberry nervously for two reasons.

1: You have a phobia about wasps, and

2: It’s performance review time.

You’ve had the initial review with your manager and agreed on a suitably outstanding grade that will trigger the bonus payment you both think you’ve earned. Today, senior managers are meeting to carry out the forced ranking of the performance curve. Today is the day of reckoning.

Each review meeting is two hours long and typically each person’s case is considered in a random order (hey it’s all about fairness here, right?), for around six minutes. You know that in previous years, around a third of those who shoot for the moon in terms of a bonus payment, land safely. So the odds aren’t fabulous, but hey – you got an outstanding grade, you’ll be fine…right?

Wrong. Your manager emerges from the review meeting looking tired and drawn and she is reluctant to make eye contact with you. You know you’re busted, and sure enough, you got downgraded. ‘Sorry’, says your boss. ‘Yours was one of the last reviews we considered, and it didn’t make it over the line.’ All of a sudden, the kids ain’t going to Disneyland and that new car just sped a little further away down the track of life.

You head back to your desk, resigned to your fate, and on the way back you pass two of your high performing colleagues. Simon and Sarah couldn’t look more different from you if they tried. Big smiles, high fives and eyes full of ££££ signs. For them, the eagle has landed. ‘How did they both manage to hang on to their bonus when I didn’t?’ you think to yourself. ‘I’m at least as good as Sarah and waaaay better than Simon. Life is so unfair.’

It turns out that Simon and Sarah were among the first people to be reviewed in that two hour meeting. And it turns out that you were on the wrong end of something scientists call, ‘The Depletion Effect’.

The following is an extract from ‘Thinking, Fast and Slow’ by Daniel Kahneman.

A disturbing demonstration of depletion effects in judgment was recently reported in the ‘Proceedings of The National Academy of Sciences’. The unwitting participants in the study were eight parole judges in Israel. They spend entire days reviewing applications for parole. The cases are presented in random order, and the judges spend little time on each one, an average of six minutes. The default decision is denial of parole, only 35% of requests are approved.

The exact time of each decision is recorded, and the times of the three judges’ food breaks – morning, lunch and afternoon – during the day are recorded as well. The authors of the study plotted the proportion of approved requests against the time since the last food break. The proportion spikes after each meal break, when about 65% of requests are granted. During the next two hours or so, until the judges’ next feeding, the approval rate drops steadily, to about zero just before the meal….The best possible account of the data provides bad news: tired and hungry judges tend to fall back on the easier default positioning of denying requests for parole.

Over the years I’ve lost track of the amount of people who allow their diaries to be flooded with back to back meetings. If you are one of those people, and you probably are, then the chances are you’re making poor decisions that affect you, your people and your customers.

Yeah I know you’re busy, but I also know that in order to go fast, you’ve got to learn to slow down. Until then – you’re a prisoner in your own workplace.

photo credit