You’re the Captain of the Ship: So Weigh Anchor and Set a Course for Good Decision Making

When you interviewed for your current job, did you respond to the organization’s initial salary offer with a (higher) counter offer?  When you purchased your current vehicle, did you respond to the salesperson’s initial sales price with a (lower) counter offer?  When you were asked to estimate next year’s budget, did you derive your estimate by starting with the current year’s budget and adjusting it for factors you thought likely to change by the next time period?  If so, you were engaged in a mental process known as anchoring and adjustment.

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Anchoring and adjustment is a thought process in which we start with an initial value or reference point (i.e. the anchor) and then make incremental adjustments from the anchor, based on additional information, to arrive at our final estimate.  We use the process of anchoring and adjustment to make judgments in a variety of situations, including estimating the value of a product, forecasting next year’s sales, and predicting future performance.  For human activities where change happens slowly, it can be appropriate and practical to use anchoring and adjustment to make judgments; however, there are also situations in which it would be inappropriate or risky to make judgments this way.

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There are (at least) two things to consider before you decide to offer a judgment based on anchoring and adjustment.  First, consider the variability of the data you’re evaluating.  Are the data relatively predictable over time or are they highly variable?  If there are large, erratic fluctuations in the values you probably don’t want to base your judgment on anchoring and adjustment because it’s highly unlikely you’ll be able to make the correct adjustments to the initial value.  Second, consider the initial value (i.e. the anchor) very carefully.  Who provided the initial value?  How was the initial value generated?  Does the initial value seem appropriate?  It’s been shown that artificial, randomly generated anchors can influence our judgments and predictions even when they are completely unrelated and irrelevant to the situation at hand, so be sure to carefully consider the anchor’s initial value if you intend to use it in your decision making process.

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Anchoring and adjustment is a thought process we use frequently to make judgments and predictions.  It can be suitable to use when historical values are reliable predictors of future values, but it can be risky if data trends exhibit significant variability.  The anchor, the initial value you consider, can have tremendous influence on your final judgment, so it’s important to ensure the initial value is appropriate for the specific situation.  By understanding the process of anchoring and adjustment, including some of the things you should keep in mind when going through the process, you will be able to use the process effectively, avoid the weaknesses of the process, and make better decisions.

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