#THE ANCHORING TRAP EXAMPLE HOW TO#

The planning department responsible for the final forecast asked each of the other departments for their forecasts using key variables such as dealer demand, competitor actions and costs. One of the Big Three automakers felt this most keenly. We are however good at making accurate estimates about time, distance, weight and volume, because we’re constantly making judgements about these and getting immediate feedback, so our minds become finely calibrated.įorecasting sales is a difficult process at best. Other than weather forecasters and bookmakers we generally don’t use a great deal of data which we carefully track over a long period of time. I have yet to see the headline “Clairvoyant wins lottery”. This is crucially important for strategy, because the first step is always defining the problem correctly. To counteract the framing trap, don’t automatically accept the initial framing – always try to reframe the problem in different ways. The questions were just framed differently. Over 70% chose the ‘less risky’ option of Plan A, even though both have the same potential outcome. Plan B: Have a one-third probability of saving the cargo on all three barges worth $600 00, but with a two-thirds probability of saving nothing. Plan A: Saving the cargo of one of the three barges, worth $200 000 These are your salvage options – which would you choose? Each barge holds $200 000 worth of cargo. In a classic experiment by Daniel Kahneman and Amos Tversky, the following was proposed: The way a problem is presented can profoundly affect the choice you make.

But an even better prescription would be for you to be honest about your motives. To address this trap, someone who plays the role of the devil’s advocate is appropriate to build up counterarguments. The second is that we become more engaged with things we like than things we dislike. The first is our tendency to decide immediately what we want to do before we have really worked out why we want to do it. There are two psychological forces that have an impact here. This cognitive bias encourages us to seek out information that supports our existing point of view, while avoiding information that contradicts it. Banks have wised up to this and have introduced a policy that the loan be reassigned to another banker when problems arise – someone for whom the original decision is not worth ‘saving’.Īs Warrren Buffett says: “When you find yourself in a hole, the best thing you can do is stop digging.” In this case the initial lender will tend to advance funds more readily in the hope of reaffirming that the original decision was the right one. This bias shows up regularly in banking when a borrower’s business runs into trouble. We tend to make choices that justify our past decisions, even if those past decisions no longer seem valid. To lessen the pull to default to what is, always remind yourself of the objective, and ask yourself whether you would choose the status quo alternative, if in fact it was not the status quo.

The perceived mental energy that needs to be expended becomes high, so we take a shortcut. Research shows that people are more likely to choose the status quo when two alternatives are presented as opposed to one. Essentially be open-minded.Ĭhoosing the status quo saves energy. To mitigate the effect of anchoring, it would be prudent to view a problem from different perspectives – alternative starting points. This might be a simple and predictable example, but the effect of anchors in decision making has been shown in numerous experiments to affect not only managers, but accountants, engineers, bankers (believe it or not), lawyers and stock analysts. Is the population of Turkey greater than 150 million? What’s your estimate of Turkey’s population? Is the population of Turkey greater than 35 million? If we asked two groups the following questions, those that were asked the second set gave a larger estimate. When considering a decision, we give a disproportionate weight to the first information we receive. There are seven cognitive traps identified by Hammond, Keeney and Raiffa in their article ‘The Hidden Traps in Decision Making’. Most of us are not flying an airplane, so this error seldom has a fatal result, therefore our misjudgements often do not get the serious attention they deserve (for insights into how pilots gauge distance, see footnote below). For example, we judge distance by how clear objects are – on a hazy day we judge objects to be further. These rules of thumb serve us reasonably well, allowing us to make decisions quickly, so that we can efficiently carry out the tasks that are demanded of us.

#THE ANCHORING TRAP EXAMPLE HOW TO#

The seven traps in decision making, and how to avoid them.

The anchoring trap example