Arbitrary Coherence (Anchoring)
Initial prices, even if arbitrary, become anchors that shape our willingness to pay for that product and related products, creating a coherent pattern of decisions influenced by the first imprint.
THE IDEA
The Anchoring Effect and Arbitrary Coherence
The concept of arbitrary coherence challenges the traditional economic assumption that supply and demand are independent. Through experiments, researchers have shown that initial prices (anchors) can be arbitrary—such as the last two digits of a social security number—yet they strongly influence future willingness to pay. This effect persists even when the anchor is irrelevant or random, and it shapes not only the immediate decision but also related choices over time.
Experiments and a Business Illustration
- Social Security Number Auction: MBA students were asked to write the last two digits of their SSN and then bid on items like wine, keyboards, and chocolates. Those with high digits (80-99) bid 216–346% more than those with low digits (1-20).
- Annoying Sounds: Participants anchored to a 10-cent or 90-cent payment for hearing an unpleasant sound. Those anchored to 10 cents later demanded only 33 cents on average, while the 90-cent group demanded 73 cents—even after being exposed to a different anchor midway.
- Starbucks vs. Dunkin' Donuts: The book interprets Starbucks’ different ambience, drink names, and prices as a way to move customers away from an existing cheap-coffee anchor. This is a business illustration, rather than one of the experiments.
- Poetry Reading: Half the participants were asked if they would pay the researcher for a poetry recitation; the other half were asked if they would be paid. The first group ended up willing to pay, while the second demanded payment—demonstrating that the framing of the first impression sets the anchor.
Implications
- Anchors affect all kinds of decisions: housing prices, salary negotiations, everyday purchases.
- First decisions are crucial because they create long-lasting imprints.
- Market prices are not purely determined by independent supply and demand; they can be manipulated by anchoring from the supply side.
- Free markets may not maximize utility if consumers are guided by arbitrary anchors rather than true preferences.
- Awareness of this bias can help individuals re-evaluate repeated behaviors and make more deliberate first decisions.
When to use it
Pricing a new product: set a high initial price (anchor) to position it as premium, even if later discounts are offered.
Salary negotiation: propose a high first number to anchor the discussion upward.
Real estate: list a property at a high price to anchor buyers' expectations, then negotiate down.
Habit change: deliberately interrupt an established pattern (e.g., renting before buying in a new city) to reset anchors.
FROM THEORY TO EVERYDAY LIFE
In practice
Social Security Number Experiment
In an auction for a bottle of wine, a keyboard, and chocolates, MBA students who wrote the last two digits of their social security number (SSN) as a suggested price ended up bidding significantly different amounts. Those with high digits (80-99) bid up to 346% more than those with low digits (1-20), demonstrating that an arbitrary anchor influences real willingness to pay.
Starbucks vs. Dunkin' Donuts
Ariely uses Starbucks and Dunkin’ Donuts to illustrate changing a price anchor. Starbucks offered a different atmosphere, drink names such as Tall, Grande, and Venti, and a more expensive experience. His interpretation is that these differences made direct comparison with cheaper coffee less likely and helped customers accept a new reference price.
A MOMENT TO REFLECT
Put it to work.
Think of a major purchase you made recently. What initial price or experience influenced your willingness to pay? Was that anchor rational?
Identify one repeated behavior in your life (e.g., coffee shop, gym membership) that started with a first decision. How might that decision have been arbitrary?
If you could re‑set a key anchor in your life (e.g., salary, housing budget), what would you change and why?
Often confused with
References
- Coherent Arbitrariness: Stable Demand Curves Without Stable Preferences — Ariely, D., Loewenstein, G., & Prelec, D. (2003)
- The Adventures of Tom Sawyer — Mark Twain (1876)
- Leaves of Grass — Walt Whitman (1855)
CONTINUE THE CONVERSATION
Source texts
- Predictably Irrational by Dan Ariely