Anchoring is a cognitive bias where an individual depends too heavily on an initial piece of information offered to make subsequent judgments during decision making.
Anchoring influences all kinds of purchases. Research found that people who move to a new city generally remain anchored to the prices they paid for housing in their former city.

Anchoring

We should pay particular attention to the first decision we make in what is going to be a long stream of decisions.
When we face such a decision, it might seem to us that this is just one decision, with little to no consequences; but in fact, the power of the first decision can have such a long-lasting effect that it will drip into our future decisions for years to come.

The power of the first decision

... and we usually don't make best decisions when it comes to it. Why? Because of three irrational quirks in our human nature:
<ul>
<li>We fall in love with what we already have.</li>
<li>We focus on what we may lose, rather than what we may gain.</li>
<li>We assume other people will see the transaction from the same perspective as we do.</li>
</ul>

Ownership pervades our lives

We don't have an internal value meter that tells us how much things are worth; we mostly focus on the relative advantage of one thing over another and estimate value accordingly.
For example, we don't know how much a six-cylinder car is worth, but we can assume it's more expensive than the four-cylinder model.)

Humans rarely choose things in absolute terms

It is a cognitive bias: we tend to have a specific change in preferences between two options when also presented with a third option that is asymmetrically dominated.
This is the secret agent in more decisions than we could imagine. It even helps us decide whom to date—and, ultimately, whom to marry.

The decoy effect

Giving up on our long-term goals for immediate gratification, my friends, is procrastination.
Emotions grab hold of us and make us view the world from a different perspective. Procrastination is rooted in the same kind of problem. When we promise to save our money, we are in a cool state. But then the lava flow of hot emotion comes rushing in: just when we promise to save, we see a new car, a mountain bike, or a pair of shoes that we must have.

The problem of procrastination

It's just the way we're wired. But that doesn't mean we shouldn't try to close them.
We need to drop out of committees that are a waste of our time. We ought to shut them because they draw energy and commitment away keeping doors open from the doors that should be left open—and because they drive us crazy.

We have an irrational compulsion to keep doors open

The basic idea of arbitrary coherence is this: although initial prices are "arbitrary," once those prices are established in our minds they will shape not only present prices but also future prices.

Arbitrary coherence

We are always looking at the things around us in relation to others. We always compare jobs with jobs, vacations with vacations, lovers with lovers, and wines with wines.
We not only tend to compare things with one another but also tend to focus on comparing things that are easily comparable—and avoid comparing things that cannot be compared easily.

Looking at things in relation to others

Money is very often the most expensive way to motivate people. Social norms are not only cheaper but often more effective as well.
If corporations started thinking in terms of social norms they would realize that these norms build loyalty and—more important—make people want to extend themselves to the degree that corporations need today: to be flexible, concerned, and willing to pitch in. That's what a social relationship delivers.

Corporations and social norms

Most transactions have an upside and a downside, but when something is FREE ! we forget the downside, FREE ! gives us such an emotional charge that we perceive what is being offered as immensely more valuable than it really is.
And that is because humans are intrinsically afraid of loss. The real allure of FREE ! is tied to this fear. There's no visible possibility of loss when we choose a FREE ! item.

Why FREE! make us so happy

A stereotype is a way of categorizing information, in the hope of predicting experiences. The brain cannot start from scratch at every new situation. It must build on what it has seen before. For that reason, stereotypes are not intrinsically malevolent.
They provide shortcuts in our never-ending attempt to make sense of complicated surroundings. But because a stereotype provides us with spécifie expectations about members of a group, it can also unfavorably influence both our perceptions and our behavior.

Expectations shape stereotypes

Without precommitments, we keep on falling for temptation. Resisting temptation and instilling self-control are general human goals, and repeatedly failing to achieve them is a source of much of our misery.
The struggle for control is all around us: books and magazines, the Radio and television airwaves are choked with messages of self-improvement and help. And yet, we find ourselves again and again in the same predicament: failing over and over to reach our long-term goals.

Why we fall for temptation

Expectations are more than the mere anticipation: they enable us to make sense of a conversation in a noisy room, despite the loss of a word here and there, and likewise, to be able to read text messages on our cell phones, despite the fact that some of the words are scrambled.
And although expectations can make us look foolish from time to time, they are also very powerful and useful.

When expectations are useful

Learn to evaluate life and business choices via the lens of Opportunity Costs

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Problem Solving

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Business

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Money & Investments

What Is Opportunity Cost

Intelligent, lively, humorous, and thoroughly engaging, "The Predictably Irrational" explains why people often make bad decisions and what can be done about it.

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Productivity

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Books

<ul> <li>Why do our headaches persist after taking a one-cent aspirin but disappear when we take a 50-cent aspirin? </li> <li>Why does recalling the Ten Commandments reduce our tendency to lie, even when we couldn't possibly be caught? </li> <li>Why do we splurge on a lavish meal but cut coupons to save twenty-five cents on a can of soup?</li> <li>Why do we go back for second helpings at the unlimited buffet, even when our stomachs are already full?</li> <li>And how did we ever start spending $4.15 on a cup of coffee when, just a few years ago, we used to pay less than a dollar?</li> </ul> When it comes to making decisions in our lives, we think we're in control. We think we're making smart, rational choices. But are we? In a series of illuminating, often surprising experiments, MIT behavioral economist Dan Ariely refutes the common assumption that we behave in fundamentally rational ways. Blending everyday experience with groundbreaking research, Ariely explains how expectations, emotions, social norms, and other invisible, seemingly illogical forces skew our reasoning abilities. Not only do we make astonishingly simple mistakes every day, but we make the same types of mistakes, Ariely discovers. We consistently overpay, underestimate, and procrastinate. We fail to understand the profound effects of our emotions on what we want, and we overvalue what we already own. Yet these misguided behaviors are neither random nor senseless. They're systematic and predictable—making us predictably irrational. From drinking coffee to losing weight, from buying a car to choosing a romantic partner, Ariely explains how to break through these systematic patterns of thought to make better decisions. Predictably Irrational will change the way we interact with the world—one small decision at a time.

Dan Ariely is the James B. Duke Professor of Behavioral Economics at Duke University. He also holds an appointment at the MIT Media Lab where he is the head of the eRationality research group. He was formerly the Alfred P. Sloan Professor of Behavioral Economics at MIT Sloan School of Management.Dan Ariely grew up in Israel after birth in New York. He served in the Israeli army and when 18 suffered third-degree burns over 70 percent of his body from an accidental magnesium flare explosion during training.Ariely recovered and went on to graduate from Tel Aviv University and received a Ph.D. and M.A. in cognitive psychology from the University of North Carolina at Chapel Hill, and a Ph.D. in business from Duke University.

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