Definition
Anchoring bias is the tendency for judgments about a quantity to be pulled toward a numerical value that has been recently encountered, even when that value is arbitrary or has no logical relationship to the quantity being judged.
Why it matters
Numerical anchors are pervasive in lifetime income evaluation. Illustrated payout amounts, competing quotes from different carriers, safe withdrawal rates, and target replacement ratios all present numbers that can serve as anchors for subsequent judgments. The order in which numbers are presented affects the individual's sense of what constitutes a good outcome.
How it works
The anchoring effect was documented by Tversky and Kahneman in the early 1970s and has been replicated across many domains and demographics. The mechanism involves insufficient adjustment from the anchor: individuals start with the anchor and adjust in the direction they judge appropriate, but the adjustment is systematically smaller than warranted. The effect appears even when the anchor is transparently random, such as a number generated by a wheel of fortune before an estimation task. Anchoring operates below the level of conscious deliberation, so awareness of the effect does not fully counter it. In practice, the first number an individual sees for a given decision tends to disproportionately shape the range of subsequent judgments about that decision.
In practice
For an individual comparing lifetime income options, anchoring is a reason to be attentive to the order and framing of numbers presented. An initial payout illustration on the high end can make subsequent, more realistic figures look disappointing; an initial figure on the low end can make subsequent quotes look attractive without regard to their absolute quality. A useful practice is to establish a reference figure independent of any single quote, then evaluate quotes against that reference. Cost-of-income analysis and realized value figures, computed against a shared benchmark, are examples of external anchors that offset the pull of whichever quote happens to be encountered first.
Related terms
- Availability heuristic
- Representativeness heuristic
- Framing effects
- Reference dependence
- Prospect theory
- Choice architecture
- Overconfidence