Anchoring Effect Experiment: Your Cost Is the Wheel.
The anchoring effect experiment shows that a number arriving first pulls later numbers toward it, even when it is irrelevant. When you set a price, your cost is that first number. So your price drifts toward cost instead of toward what the buyer values.
A rigged wheel and a question about Africa.
In 1974, Amos Tversky and Daniel Kahneman published a paper in Science. People watched a rigged wheel stop on ten or sixty-five. Then they guessed what percentage of United Nations countries are African. Those who saw ten gave a median of twenty-five per cent. However, those who saw sixty-five said forty-five.
What the anchoring effect experiment means for sellers.
Everyone knew the wheel was random, yet it moved answers by twenty points. Similarly, anchoring bias in pricing shows up when people set prices. Experimental work found they anchor on cost, not demand or value. Because cost is the only number in front of them, researchers link it to consistent underpricing.
Two people, two sets of books.
In 2000, Dan Ariely published a paper on why buyers and sellers see one object differently. Sellers focus on what they give up, while buyers focus on what they get. That is the cost plus pricing problem in a sentence. For example, house sellers raise asking prices because of property taxes already paid, which no buyer cares about.
Spot your own anchoring effect experiment tonight.
Write down the first number you looked at before setting your current price.
Then write one sentence on what the buyer gets, ignoring your cost completely.
From the book.
So your cost is the wheel. It spun in front of you, you know perfectly well it's irrelevant to the buyer, and it's anchoring your number anyway. What did you spin before you set your price?
I Want to Start a Business but I Don't Have Money, chapter 7: Why you will price too low
Questions about anchoring effect experiment.
What did the anchoring effect experiment by Tversky and Kahneman find?
A rigged wheel stopping on ten or sixty-five shifted guesses about African UN members. Median answers moved from twenty-five to forty-five per cent.
What do people anchor on when they set prices?
Experimental work found they anchor on cost, not on demand or value. Researchers connect this to consistent underpricing.
Why do buyers and sellers disagree about price?
Ariely found sellers focus on what they give up, while buyers focus on what they get.
Read the whole chapter.
This lesson covers one section of chapter 7, “Why you will price too low”. The book goes further, with the full evidence, the stories and every exercise.
Lessons in this chapter.
- 01 Why Freelancers Undercharge: The Number Comes From You.
- 02 Anchoring Effect Experiment: Your Cost Is the Wheel.
- 03 Price Placebo Effect: What the Evidence Really Shows.
- 04 Penetration Pricing Risks: Why Cheap Can Sink You.
- 05 Water Diamond Paradox: Cost Is Not the Buyer's Value.
- 06 When to Raise Your Prices: The Cost of Waiting.
- 07 Gabor Granger Method: Test a Higher Price Tonight.
- 08 What Your Price Says About You: Read It Cold.