The Anchoring and Adjustment Heuristic

Three years ago, I bought myself a PlayStation Portable (PSP) at Sim Lim Square. Prior to the actual buy, I compared the prices at more than five different outlets and realized that they were all selling it at $290. With the assurance that they had done away with the price war that was prevalent years before, I decided to buy it from the very first shop I had gone to.

As I was about to purchase the PSP, the owner of the store started pushing some add-ons to me: first a memory card, then a protective case, and finally a pair of earphones. For some reason unbeknownst to me then, I barely hesitated. Before I realized it, I was $550 down. I had spent almost twice of what I had intended. Two months later, I found out from my friends that I had been cheated. The owner had charged me three times the market prices for both the case and the earphones.

How is it that I allowed myself to be cheated so spectacularly? How could I have paid so little attention to the prices? Those add-ons did not come cheap. If I had given more consideration to their prices, I might very well have realized that they were grossly inflated. More importantly, why did I buy the add-ons when, on a separate day, I would never have considered them at those prices?

In 1974, Tversky and Kahneman presented the anchoring and adjustment heuristic to account for how people estimate quantities. In the classic study, participants were asked to estimate the percentage of African countries that belonged to the UN. Before making their estimates, half of the participants were asked if it was more or less than 10% (an anchor), while the other half were asked if it was more or less than 65%. Those that were presented with the lower anchor of 10% reported significantly lower estimates (25% on average) than those presented with the higher anchor of 65% (65% on average). Ariely, Loewenstein, and Prelec (2003) carried out a similar experiment in which participants were allowed to bid for items in an auction, but only after writing down their Social Security numbers and asked if they would pay an amount equal to it for the items. Those who had higher Social Security numbers ended up bidding significantly more for the items. These experiments showed that arbitrarily selected anchors could in fact skew the subjects’ judgment considerably.

This was the same anchoring and adjustment heuristic I unconsciously used and fell prey to: I was fixated on the irrelevant price of the PSP (which served as the anchor), and adjusted downward to decide what would have been a reasonable price to pay for the add-ons. However, I failed to adjust downward sufficiently from the high anchor, resulting in a much higher willingness to pay than usual. Since the add-ons were cheaper than the maximum I was willing to pay, they appeared like a bargain to me and I went ahead with the purchases. The result? I ended up paying much more than I really should have. The anchoring and adjustment heuristic led me to think of the values of the add-ons in relative terms; I determined my willingness to pay for them based solely on the price of the PSP.

Having explored the cognitive underpinnings of my irrational behavior, what can we do to avoid making the same mistake? I have found two strategies to be particularly useful. The first is to be constantly aware of the anchoring and adjustment heuristic in daily situations. As with most cognitive heuristics, we often use it without being aware of it. Suppose you are having dinner at a posh restaurant. You aren’t feeling too hungry, so you decide that a beefsteak is just enough for you. You place your order, and the waiter says to you, “ would you like to add on the soup of the day for just three dollars?” Would you? Most people would, since $3 for soup isn’t much compared to $30 for beefsteak. But as you struggle to finish your steak, you catch yourself wondering if this was really a good decision. If we can recognize the prevalence of this cognitive bias in our everyday transactions, we can overcome this temporally heightened willingness to pay and avoid buying what we don’t really need. In my case, I would have paid more attention to the intrinsic worth of the add-ons, instead of simply anchoring on the price of the PSP.

The second strategy requires us to ask ourselves two questions before we commit ourselves to an add-on. First, would the utility you derive from your purchase be at least equal to what you pay for? If so, it may be a good buy. The second and overriding question is, would you be able to better spend that money elsewhere? If so, then it would be a bad buy.[1]Adopting a broad perspective by considering alternative uses of the money serves as an excellent reminder of what we are giving up when we purchase an add-on, and thus forces us to assess it for what it is really worth.


1] The opportunity cost of the add-on is a better decision criterion. An add-on may still be a bad buy if it passes the first test but not the second.

Memory as a Process of Reconstruction

One of the most important findings in cognitive psychology relates to memory. Often, we think of memory as storing information in a hard drive within our brain, retrieving it wholesale when we need to. But this is in fact far from the truth: experiments have shown that we don’t quite store information in its entirety; instead, we only distill and then store the gist of it. When we need this information afterward, we reconstruct (as opposed to retrieve) the memory.

Here’s a common trick from Dan Gilbert’s Stumbling on Happiness, a truly wonderful read on how we often fail to predict what makes us happy:

Read the list of words below, and when you’ve finished, quickly cover the list with your hand. Then I will trick you.

Bed

Rest

Awake

Tired

Dream

Wake

Snooze

Blanket

Doze

Slumber

Snore

Nap

Peace

Yawn

Drowsy

Here’s the trick. Which of the following words was not on the list? Bed, doze, sleep, or gasoline? The right answer is gasoline, of course. But the other right answer is also sleep, and if you don’t believe me, you should lift your hand from the page. If you’re like most people, you knew gasoline was not on the list, but you mistakenly remembered reading the word sleep. Because all the words on the list are so closely related, your brain stored the gist of what you read (a bunch of words about sleeping) rather than storing every one of those words. Normally this would be a clever and economical strategy for remembering, The gist would serve as an instruction that enabled your brain to reweave the tapestry of your experience and allow you to ‘remember’ reading the words you saw. But in this case, your brain was tricked by the fact that the gist word – the key word, the essential word – was not actually on the list. When your brain rewove the tapestry of your experience, it mistakenly included a word that was implied by the gist but had not actually appeared.

As for me, I’d seen this trick before; but when I read the book, I fell for it once again.

Evolutionary Psychology

Another approach to psychology which promises much is Evolutionary Psychology. Evolutionary psychology explains human behavior and cognition using such theories of evolution as natural selection and adaptation.

Charles Darwin’s theory of natural selection may simply be thought of as the “survival of the fittest”. The idea behind natural selection is that organisms with better genes are more likely to survive and reproduce than those with weak genes; over successive generations, these genes are passed down in the form of heritable traits. Hence why we behave the way we do, at least according to this approach, is because the behavior is adaptive and gives us a better chance of passing down our genes to future generations. For example, some evolutionary psychologists believe that we are capable of language because being able to communicate provided our ancestors an adaptive advantage over the other animals, hence our language ability has persisted till today.

As with the behavioral approach, the evolutionary approach is somewhat counterintuitive. When I first came across Darwin’s theory of evolution, I found it hard to accept why our behavior would be governed by such deep-seated, innate drives. I didn’t deny the existence of an unconscious mind, but the fact that we are very much conscious of what we do was enough to convince myself about the limitations of natural selection. This is where proximal causation and ultimate causation comes in.

It is important to distinguish between the two: proximate causation explains that we do what we do not because of the ultimate goal of reproducing. Rather, we focus on our immediate drives, such as hunger and thirst. Ultimate causation, on the other hand, explains that our behavior, in the long run, is as such because it is adaptive and geared towards the ultimate goal of reproduction. An excerpt from Paul Bloom’s lecture should illustrate this better:

This is a point nicely made by William James. So, William James is asked, “Why do we eat?” And he writes,

Not one man in a billion when taking his dinner ever thinks of utility. He eats because the food tastes good and makes him want more. If you asked him why you should want to eat more of what tastes like that, instead of revering you as a philosopher, he will probably laugh at you for a fool.

And it’s really the common sense answer. “Why are you eating?” Nobody’s going to answer, “Because I must sustain my body so as to spread my genes in the future.” Rather, you eat because you’re hungry.

Behaviorism

What comes to your mind when you come across the term “psychology”? For most of us, we tend to think of mental illnesses such as depression and schizophrenia. As well, we think of abstract concepts such as personality, emotions, and consciousness. But probably the very first thing that we think of when we see the word psychology is the concept of mind.

While applied psychology is most commonly seen in clinical contexts, it is not all that the field has to offer because psychological disorders only form the subfield of abnormal psychology. Similarly, it is difficult to grapple with the idea that psychology is more than just about the mental processes that take place in our heads – it extends to observable behavior, which forms much of the basis behind the study of psychology. One of the earliest approaches to psychology was behaviorism, the dominant school of thought in the first half of the 20th century.

Behaviorism first flourished under the intellectual leadership of psychologists John B. Watson and B.F. Skinner, emphasizing the scientific study of observable behavioral responses and their environmental determinants. Behaviorism provides that our behavior is influenced entirely by environmental factors; in the process, it discounts the importance of cognitive processes. For example, a child who always throws tantrums in public could be doing so because his parents give in to him every time he makes a scene, so he now knows how to get his way. Meanwhile, a teen who studies consistently for her exams might be willing to do so only because she gets rewarded whenever she does well. A famous quote from Watson captures the essence of behaviorism best:

Give me a dozen healthy infants, well-formed, and my own specified world to bring them up in and I’ll guarantee to take any one at random and train him to become any type of specialist I might select – doctor, lawyer, artist, merchant-chief and, yes, even beggar-man and thief, regardless of his talents, penchants, tendencies, abilities, vocations, and race of his ancestors.

I suspect that this might be a preposterous idea to most of us now. How can it be right to suggest that we are influenced to the extent that we cannot exercise free will? Don’t we get a say?

The main reason that behaviorists chose to approach psychology from this perspective is that it allowed the world to look upon psychology as a real science: only by moving away from “nonscientific” methods such as introspection in favor of empirically observable results would people start taking psychology seriously. While contemporary behaviorists still adopt the same approach in research, most do not deny the role of cognition and biology in behavior.

An introduction

Psychology is the study of our behavior and mental processes, using scientific methods to describe, explain, predict, and control behavior.

Two common misconceptions about psychology:

1. Psychology is just common sense.

Contrary to popular belief, psychology is not simply common sense laden with plenty of jargon to make simple concepts sound complicated. Psychology suffers from this misconception because concepts studied in psychology such as emotion, personality, intelligence etc are often intuitive to us. That is to say, each of us has an intuitive idea about what love is – why then should we reduce the study of love and attraction to such technical study? The problem is that common sense is not in fact, that common.

What is common sense? Defined using common sense, common sense would mean something that everyone agrees on without needing higher level processing. For example, if I say: I can’t go downstairs cos’ the lift isn’t working; you’d reply: Use your common sense, take the stairs! Common sense isn’t just restricted to how we use it in everyday conversations; it expands to encompass folk wisdom: for example, we all “know” that it’s better to be safe than sorry. But what of the common saying nothing ventured, nothing gained? When we notice a couple with very different personalities and hobbies, we attribute it to a case of opposites attract. But what of the saying that birds of the same feather flock together? It appears that folk “wisdom” has an explanation for everything, but only after the event has happened. Otherwise, the contradiction is clear. The point is, is common sense good sense?

Psychology employs empirical methods to test the hypotheses of common sense. This happens to be one reason why the study of psychology is interesting: it offers the possibility for us to challenge the “common sense” that has been accepted without question for centuries. For example, research has provided evidence against the claim that opposites attract (which by default lends weight to the claim that birds of the same feather flock together). We like people who are like us, and that explains why we are thrilled to find someone who shares the same birthday or number plate with us.

2. Psychology is only worth studying because it is interesting; otherwise it adds little value to our society.

I suspect this is also applied to philosophy as well because I used to hold these beliefs. But I feel the need to recognize the purpose of studying, because I subscribe to the belief that knowledge is only worth as much as it can be applied. Studying psychology is more than just interesting. Its findings hold profound implications for fields as diverse as neurobiology in helping blind patients to see; clinical psychology in the treatment of mental illnesses; economics and finance in decision making and risk taking; public policy in the use of choice architecture to elicit favorable behaviors, etc. (As for philosophy, I think the value in studying lies in the development of such cognitive abilities as reasoning, logic and critical thinking – such thinking skills can be applied anywhere.)

Learning

Two interesting things I learnt about learning today:

1. Why shouldn’t passersby praise, pet, or feed a service dog while he is working?

Service dogs learn by operant conditioning, a form of associative learning in which the consequences of a behavior changes the frequency of the behavior’s occurrence. For example, a child may be rewarded with ice cream (consequence) for completing his homework (behavior). This encourages him to continue being diligent in his work. Providing rewards while the dog is working may interfere with his training.

2. Where did the idea for the Homing Pigeon in Worms come from?

B.F. Skinner, an American psychologist famous for his work on Behaviorism, tested the concept of a pigeon-guided missile during World War II. A pigeon in the warhead would operate the flaps on the missile and guide it home by pecking at an image of a target.  How could this work? When the missile was in flight, the pigeon pecked the moving image on a screen, receiving a reward of food to keep the designated target in the center of the screen. This reward produced corrective signals to keep the missile on course. It worked, but it was never put into practice. Once again, the principle of operant conditioning.

In economics, this would simply be known as incentive theory.

Lateralization of brain functions

Two findings from biopsychology that point to the localization of language in the left hemisphere of the brain:

Broca’s Aphasia

The process of identifying the parts of the brain that are involved in language began in 1861, when Paul Broca, a French neurosurgeon, examined the brain of a recently deceased patient who had had an unusual disorder. Though he had been able to understand spoken language and did not have any motor impairments of the mouth or tongue that might have affected his ability to speak, he could neither speak a complete sentence nor express his thoughts in writing. The only articulate sound he could make was the syllable “tan”, which had come to be used as his name.

When Broca autopsied Tan’s brain, he found a sizable lesion in the left inferior frontal cortex. Subsequently, Broca studied eight other patients, all of whom had similar language deficits along with lesions in their left frontal hemisphere. This led him to make his famous statement that “we speak with the left hemisphere” and to identify, for the first time, the existence of a “language centre” in the posterior portion of the frontal lobe of this hemisphere. Now known as Broca’s area, this was in fact the first area of the brain to be associated with a specific function—in this case, language.

Wernicke’s Aphasia

Ten years later, Carl Wernicke, a German neurologist, discovered another part of the brain, this one involved in understanding language, in the posterior portion of the left temporal lobe. People who had a lesion at this location could speak, but their speech was often incoherent and made no sense.

Wernicke’s observations have been confirmed many times since. Neuroscientists now agree that running around the lateral sulcus (also known as the fissure of Sylvius) in the left hemisphere of the brain, there is a sort of neural loop that is involved both in understanding and in producing spoken language. At the frontal end of this loop lies Broca’s area, which is usually associated with the production of language, or language outputs . At the other end (more specifically, in the superior posterior temporal lobe), lies Wernicke’s area, which is associated with the processing of words that we hear being spoken, or language inputs. Broca’s area and Wernicke’s area are connected by a large bundle of nerve fibres called the arcuate fasciculus.

This language loop is found in the left hemisphere in about 90% of right-handed persons and 70% of left-handed persons, language being one of the functions that is performed asymmetrically in the brain. Surprisingly, this loop is also found at the same location in deaf persons who use sign language. This loop would therefore not appear to be specific to heard or spoken language, but rather to be more broadly associated with whatever the individual’s primary language modality happens to be.

Source: http://thebrain.mcgill.ca/flash/d/d_10/d_10_cr/d_10_cr_lan/d_10_cr_lan.html

These two anecdotes are very interesting, nonetheless recent research however shows evidence for language processing abilities in the right hemisphere. More on that in future.

Buying Green is About Being Seen

What does green have going for it? This article is taken from PsyBlog:

One of the most successful cars in the US is the hybrid electric Toyota Prius. On the surface there isn’t much going for it: it has a sluggish engine, small trunk, cloth seats and it’s certainly no looker. Oh, and it costs thousands of dollars more than a similar car from another manufacturer, such as the Honda Civic.

What it does have is a marketing campaign emphasising its fuel-saving, environmental pedigree. So people buy it to do their bit to save the planet, or at least to save fuel.

Or do they? When Prius owners were asked in a survey why they bought the car, environmental concerns came in at fifth. Fifth?

Top of the list was it, “makes a statement about me.” So the market tells us that people are prepared to pay more for an inferior product in order to display to others their environmental concern. Can this really be true?

A new study by Vladas Griskevicius at the University of Minnesota and colleagues tested this out:

“…a series of experiments showed that activating status motives led people to choose prosocial green products over more luxurious, equally priced non-green products. In line with the predicted reputational benefits of self-sacrifice, status motives increased desire for less-luxurious green products when shopping in public, but not in private. Indeed, when people considered shopping in private, status motives produced a tendency toward self-indulgence rather than self-sacrifice.” (Griskevicius et al., 2010)

People buy a Prius instead of a BMW both because it’s just as expensive (“Hey, I’ve got money!”), and because it’s a mobile billboard for the driver’s environmentalism (“I’m well off, but I’m prepared to make sacrifices, therefore I’m a good person”). This only works because of how people think others will view them. If it was cheaper, Toyota might not have sold 1.6 million of them. Same goes if their owners couldn’t be seen by others driving around in them.

The irony is that environmentalists originally thought that lower prices, tax breaks and messages about being less selfish would encourage people to go green.

They may well do, but what this study suggests is that in some circumstances the exact reverse is required: higher prices and appealing to people’s selfishness by drawing attention to the message their purchases are sending to others.