Don’t let this anchor sink your finances
Ever spotted a product online marked down from $90 to $37 and thought, "What an amazing deal! I need to buy this right now before it goes back to normal price!"? Before you smash "buy,” consider this: your brain might be falling for a common psychological trap.
What is Price Anchoring?
Anchoring occurs when we rely too heavily on the first piece of information we receive when making financial decisions. This initial reference point—the "anchor"—shapes how we perceive all subsequent information, even if that anchor is completely arbitrary.
So how does anchoring affect our finances, and what can we do to overcome it?
No time to waste, let’s get into it:
Shopping and Negotiations
When a car salesperson starts negotiations at $30,000 for a vehicle worth $22,000, suddenly $25,000 feels like a victory. The high initial price anchored your expectations, making you willing to pay more than the car's actual value.
This shows up in stores and online as well. When an item is on sale, stores will use "reference pricing" (showing the higher "regular" price alongside the sale price). This is a deliberate marketing tactic designed to exploit anchoring bias. Research shows even unrealistic reference prices can still influence purchasing decisions.
How to counter it: Research market values independently before negotiations and be prepared to walk away.
Investment Decisions
The price you initially paid for a stock becomes an emotional anchor. Many investors resist selling losing investments, waiting to "break even" even when cutting losses would be smarter. This feeling occurs due to both price anchoring and another cognitive bias called Sunk Cost Fallacy.
How to counter it:
Determine price targets before purchasing
Know what you own
Avoid checking your account obsessively and schedule periodic reviews instead.
Research thoroughly to ease investment anxiety
Consider broader funds if individual stock picking causes stress
Salary Negotiations
If you're making $50,000 and seeking a new job, you might anchor your expectations around that figure plus a small increase—even if your market value is significantly higher.
How to counter it:
Research industry salary ranges
Practice your salary request before interviewing
Remember: you don't make what you're worth—you make what you ask for
Housing Purchases
The first few houses you view become reference points for judging all subsequent properties, regardless of whether those initial prices reflected fair market value.
How to counter it:
Be aware of hidden costs
Evaluate total ownership costs, not just purchase price
View many properties before making decisions
Consider long-term value rather than initial price comparisons
One final note: Anchoring bias can be experienced in varying strength based on experience, familiarity and conscious awareness of anchoring. The more you know about a given item, the less you will fall prey to anchoring bias.
What other financial anchors might be influencing your decisions today?
Quote of the week:
"If you buy what you don’t need, you steal from yourself.” - Swedish Proverb