We love a good sale, but we don't love it when we buy things that we don't need, that aren't in our budget, and that we didn't intend to buy in the first place. Easy enough, right? It turns out that this may not be as simple as it seems, thanks to something called the “anchoring effect.” For the non-psych majors among us, the anchoring effect is a condition that says we all tend to make decisions and guesses based on, well, anchors. In financial matters, anchors are the first numbers or prices you perceive, and no matter how ridiculous they are ("Three hundred dollars for that thing?"), they will influence how much you eventually choose to pay for an item or service.
An age-old story: You're on your lunch hour and see a beautiful shirt in a boutique window. A sign announces a "SALE!" When you check the price tag on the blouse, you see that it's been marked down $100 to $40. You weren't exactly in the market for another top like this, but it's such a steal – over 50% off –and well-made clothes last longer than cheap ones and on and on, and before you know it, you're carrying an extra shopping bag back to the office.
If the shirt had been priced at $40 originally, you wouldn't have felt you were getting a good deal and might have passed it up. In fact, you might not have even paid forty dollars for a shirt like this (“Is this real cotton?"), had the first price tag not influenced you to think the item had a higher value. This is the anchor effect at work, and it can be hard on your wallet because at the beginning of your lunch hour, you were content to spend zero dollars, but in the end you spent 40. We are wired to make estimates based on comparisons, and when we don't have any other numbers to go on, we unconsciously lean towards the first value we heard. Remember that no one said the shirt was worth $100 of your hard-earned dollars besides the store that was selling it – the shirt might really only have been worth $20.
Blogger David McRaney breaks down the anchoring effect in detail and gives some very real examples. Unfortunately, there are very few things we can do to try to correct it, so instead, focus on being a smart shopper and setting up a few rules before you go out. Know what you want to pay for something before you go buy it, and know exactly what you’re willing pay so that you stick to your budget. You can try bringing a friend along if you're going bargain hunting so you have another voice to remind you what deal you wanted originally.
This means that the biggest challenge is the first number you see. But sometimes the anchoring effect can work for you if you can plant the number yourself. If you’re the seller, for instance, you can price the item high and then generously give out a discount. And use this for more than just the occasional haggling at a garage sale: If you're negotiating your salary, put a high number on the table first.