If you negotiate with the owner to get it to $1,250, you will believe you got a great deal, even if you didn't, since your brain decided that the value of the item was $1,500 based on potentially erroneous data. Fortunately, in this instance, you're buying something for yourself, so the intrinsic value matters a lot less than if you're buying it as an investment to resell.
Example 2. Your friend has been enthusiastic about XYZ, Inc.'s meteoric rise in the market for months now, and you have finally decided that it's time to jump in. They tell you that it's only been going up and up, and you don't want to miss out on any more gains. So, you buy shares at $100 each, which becomes your anchor point.
Unfortunately, you didn't do any due diligence, instead trusting your friend, and when the stock hits a little bump, dropping it to $85 per share, your anchor is still fixed at $100, so you hold on, even though you don't know what's causing the drop. Your brain is convinced it's worth at least $100 based on your anchoring bias.
A month later, it's at $65, and you're still waiting for the stock to rise again. You stay in that mindset for far too long, eventually selling at $50 and losing 50% of your investment. Your anchor point did you wrong.
How can you use anchoring to your benefit?
An anchoring bias can cause you a world of hurt, but being aware of it can also help you, if you're savvy enough to take advantage. When you're selling an item, like that antique you overpaid for in our first example, you can start with a higher price than what you expect to get -- many people do this in practice anyway.
When you set the price at $1,750, for example, you can be fairly confident that you'll be offered less, but you'll still end up with more than you paid by starting so high because the person you're selling to is also being affected by an anchoring bias. When you come down, and they come up in the negotiation, they're doing so from their anchor point of $1,750 and not the one you have in your own head, which may still be the $1,500 sticker price.
Another place where anchoring biases can help you would be in selling more difficult-to-price assets like real estate. Real estate has intrinsic value that can be appraised, but with things like multifamily and commercial properties, it's very hard to get an exact figure because there are no two properties that are identical. So, if you price the property higher than you believe it's worth but not so high that you won't get an offer, the anchoring bias can come into play again.
A potential buyer will look at the property, make an offer based on the price you're asking -- their anchoring bias -- and you take it from there. You may be asking $3 million for a small commercial building, for example, and the buyer may offer $2.75 million rather than the $2 million they were planning to spend when they started shopping.
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