Legal Definitions - anchoring

Anchoring refers to a common psychological phenomenon where individuals tend to rely heavily on the first piece of information offered (the "anchor") when making decisions, especially when that information is numerical. This initial anchor then unduly influences subsequent judgments, estimates, or negotiations, even if the anchor itself is arbitrary or irrelevant. People often fail to adjust sufficiently away from this initial value, leading to outcomes that are biased towards the anchor.

Here are some examples to illustrate how anchoring works:

• Real Estate Negotiation: A homeowner lists their property for sale at $1.2 million, even though comparable homes in the area typically sell for around $950,000.

  Explanation: The $1.2 million asking price acts as an anchor. Potential buyers, even those aware of market values, might find their initial offers or counter-offers starting higher than they would have if the property was listed closer to its true market value. For instance, a buyer might offer $1.05 million, feeling it's a significant discount, whereas without the high anchor, they might have started their offer at $900,000. The negotiation range becomes skewed towards the higher initial price.

• Retail Product Pricing: A new smart device is introduced with a "manufacturer's suggested retail price" (MSRP) of $800, but it's immediately offered for sale at a "promotional price" of $550.

  Explanation: The $800 MSRP serves as an anchor. Consumers perceive the $550 promotional price as a substantial discount from the higher anchor, making the deal seem more attractive. They might be more inclined to purchase at $550, believing they are getting a great bargain, even if the device's actual value or production cost might suggest a fair price closer to $450. The initial high price influences their perception of value for the lower, "sale" price.

• Legal Settlement Discussions: In a civil lawsuit for damages, the plaintiff's attorney makes an initial settlement demand of $5 million, even though the estimated actual damages and potential jury award are likely in the range of $1.5 million to $2 million.

  Explanation: The $5 million demand acts as a high anchor. When the defense attorney prepares their counter-offer, they might be influenced by this large initial figure. Instead of countering with, say, $1 million, they might offer $2.5 million, feeling it's a reasonable compromise from the plaintiff's demand. This anchoring effect can push the eventual settlement amount higher than it might have been if the initial demand was more realistic, as both parties' subsequent offers are framed by the initial high number.