Why we sometimes make bad decisions: The anchoring and adjustment heuristic

How much to pay for the house of your dreams

Imagine you are interested in buying a house and you've been out looking on the weekends. You find a 3 bedroom, 2 bath bungalow on a quiet street that already feels like home. The asking price is $475,000 (for those of us living in pricier areas, play along by imagining it's 1995). You want the house, but you don't want to pay too much. You've noticed other comparable homes in the area seem to go for anything from $350,000 to $600,000. So how much do you offer? Have a number in mind? Now, read through the scenario again, but this time imagine that the asking price is $439,999. How much would you offer then? Do you come up with a different number?

Let's try a different example: First, what are the last two digits of your telephone number? Got that number in mind? Now, I'd like you to think about what percentage of African countries are in the United Nations. Do you think there are more or less than the telephone number? How many more or less? Amos Tversky and Daniel Kahneman did a similar study in their seminal 1974 paper on biases in judgment and they found that people who had a lower number (after spinning a wheel of fortune) estimated fewer countries than people who had a higher number. For example, the median answer for people who spun a '10' was 25%, whereas the median answer for people who spun a '65' was 45%. So why does a random number influence our judgment about something unrelated?
Read More->