Money Traps, Part 1: Outsmarting the Anchor-Price Comparison Trap

by Jessica Sommerfield · 5 comments

Dealing with a dishonest salesman or falling for a sneaky marketing ploy are experiences we can learn to identify and avoid, but there are other kinds of money traps many of us fall for – and they start in our own minds.

A common scenario that illustrates the first of these mental traps is shopping for a used car. After negotiating back and forth with the owner, you manage to agree on a price that’s several hundred dollars less than the list price and sign the title feeling like you got a great deal. Later down the road, you discover the car is worth even less than the discounted sale price. If this example doesn’t apply, perhaps you’ve fallen for this trap while purchasing a new television, an expensive piece of jewelry, or a home in a new area.

The tendency to use the first piece of information we hear or see as our “anchor” for making subsequent spending decisions is called the anchor price comparison trap (some also refer to it as the relativity trap or focalism). This happens most frequently in categories that are new to us, where we have nothing to compare to the prices we encounter.

Whatever you choose to call this behavior, it’s a verifiable bias built into our mental wiring, and it can cost us a lot. The good news is that you can outsmart your own tendency to create pricing anchors with a few simple strategies.

1. Be aware that this trap exists.

The first step to outsmarting this psychological trap is to be aware that we tend to create anchor prices for just about every category of consumption, and they stick hard (like an anchor). Knowing this is how your mind works will make it easier to prepare for situations when you’ll be tempted to compare prices to your mental anchors, regardless of whether they’re accurate. Doubting yourself, in this case, is a good thing!

2. Hesitate before snatching up a “great deal.”

If you’ve felt buyer’s remorse after falling for the anchor price trap one too many times, save yourself some guilt and money by pausing before every purchase, even if it’s a once-in-a-lifetime deal. Quite often, giving the decision some time will reveal new information that sets the “great deal” price in a more realistic context.

It’s especially important to use this strategy with a major purchase like a home since prices and values are established based on the housing market of the individual city or region. A $500,000 home in one area might not be comparable to a similarly-valued house in another area, so shop carefully!

3. Filter the anchor price out. Is it still worth it?

All too often, we see something advertised as 75% or more off the list price and assume it’s a great bargain. In comparison to this anchor price, the sale price seems like an incredible deal. But is it?

A good strategy for determining if a sale price is a good deal is to mentally block out the regular list price. Does it still represent a good deal for the item, for you, and for your budget? This can be hard to do if you’ve already seen the list price but try it anyway. This approach can help you view the price of “great deal” purchases more realistically.

Maybe you no longer fall for the tricks of a sneaky salesman, but do you fall for your own mental money traps? Watch for the anchor price comparison trap and you’ll save yourself both money and regret.

Like this article? Check out the other parts of the money trap series below:

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{ read the comments below or add one }

  • webbrowan says:

    I personally have a preference of finding a trustworthy loan advisor so that I can have safe and sound financial advice when I need it. It helps if you build a long lasting relationship with your consultant so that whenever you need to make a big purchase, you can go back to your advisor for help.

  • Fascinating cognitive bias. It really highlights the importance of the primacy effect in everything we do (and, therefore, reaffirms the importance of making a great first impression). In her most recent Psychology Today article, one of my favorite social psychologists, Heidi Grant-Halvorson, talks about a study involving two students: Timmy and John.

    “Imagine two children, each taking a 30-question math test. On the first half, Timmy gets 14 out of 15 correct, while John gets only six. In the second half, the scores reverse with John getting 14 and Timmy only six. Objectively, these two children have both performed at exactly the same level by getting a total of 20 out of 30 problems correct. So rationally, anyone watching would conclude that they have the same level of mastery in math, right?”

    It turns out that people see Timmy as being MUCH more talented than John. Because most people make up their minds about others within the first fifteen minutes of meeting them, the worst part is that John can’t do much to overcome people’s assumptions. Mixed with confirmation bias, the primacy effect becomes deadly. John has to consistently prove that his mathematical ability is better than Timmy’s, even though it was better (or on par) on Day 1.

    I think one of the most important things you can do as a consumer is to learn about these biases. Then, do your best to stay away from situations where you’re prone to act on them (i.e. never leave your home in America LOL).

  • Durga says:

    Normally we don’t care about this trap and would fall in it easily without knowing that we are into it. But your post would surely help the readers to be safe and away from such money traps by setting some anchor price.

  • I forget about the opportunity cost when I spend inordinate amounts of time trying to save money. For example, I recently spent 20 minutes in order to save $3 on a tank of gas. The hourly rate to get the cheaper tank of gas was $9/hr. Not worth it in my opinion.

    • Marc says:

      It’s going to depend, what else woukd have you done with those twenty minutes? If nothing then why not save the money.

      For me, i will spend a little extra time to not reward the business charging more.

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