Anchor Pricing aka The Relativity Trap at Work: The higher regular price of \$260 makes the discounted sale price of \$129.99 seem irresistable.

# Beware of Anchor Pricing aka The Relativity Trap

## Have you ever bought something on sale and regretted it later? Were you so caught up in the discount and what you were saving that you didn't pay attention to what you were getting? Blame the anchor effect, also known as the relativity trap.

Have you ever bought something on sale and regretted it later? Were you so caught up in the discount and what you were saving that you didn't pay attention to what you were getting?

Most of us have, and it usually starts with a price tag like the one shown above is usually. It effectively exploits what is known as the relativity trap or anchor effect. It is a kind of cognitive bias where we place too much importance on one piece of information (in this case the higher regular price of \$260.00) and evaluate all subsequet information (in this case the lower discounted price) relative to it.

In this case the higher price acts as an anchor that establishes the value of the item as \$260.00, making the discounted price of \$129.99 seem like a great deal.

That can be a problem. We can get so hung up on how much we're saving we stop thinking about how much we're spending and what we're actually getting.

During decision making, anchoring occurs when individuals use an initial piece of information to make subsequent judgments. Once an anchor is set, other judgments are made by adjusting away from that anchor, and there is a bias toward interpreting other information around the anchor.

Would the sale item be as appealing if the anchor price were not shown? Would it be as tempting if the only price to appear were the discounted price of \$129.99?

Almost certainly not! A lot of research goes into the way that price tags are formatted, and it all says that the context provided by the higher regular price makes the lower discounted price much more appealing.

As a consumer the best thing you can do is try and filter the anchor price out. Just put your thumb over it, and ask yourself if you would still be interested in the item if the lower sale price was the only price.

If it were a tradeable commodity like gold it would be very different. If you could buy the item at a lower discounted price and sell it at the higher market price then yes – you should buy (and sell immediately) as much as possible.

But most of what we buy is not for resale, and what we might be saving is not nearly as relevant as what we are spending. Either the item appeals at the sale price (ignoring the context provided by the anchor price) or it doesn't. In this case spending money to save money does not make sense.