Anchoring Effect: The Mechanism Behind Haggling


Think about Mechanics, Tailors, Carpenters, Plumbers, Hairdressers, Cloth sellers in the Nigerian informal market. What’s the one thing they all have in common? You have got to haggle your mouth off to get some service or purchase their product. Given the popularity of haggling, I’ve been curious about the mechanism behind it. And given that we’ve engaged in haggling or will at some point in the future, I’ll explain how sellers psychologically trick us into spending more.

I often hear a lot of people talk about how good they are at haggling. I’ve heard people say ‘I can price! I get everything cheap! By the time I’m done bargaining, you’ll pity the seller‘. Au contraire… you’re the one that’s most certainly getting financially shafted. ‘Commonsensically-put’, no trader is selling any product to you at a loss because you sweet-talked him/her into it. Eventually, every buyer gets tricked into believing that he/she got an excellent bargain from his purchase.

Information asymmetry is the first reason buyers never get a good deal. Information Asymmetry occurs when one party knows more about a product than the other party does. In our case, it’s when the seller knows more about a product than the buyer. The second you walk up to haggle, the Igbo guy selling you that shoe already has more knowledge of the transaction about to occur than you do. He knows the real price, quality of the shoe & how long it’ll last before you’ll need a ‘shoe-maker’. Heck, he might even know what part of China that shoe came from! Let’s not forget that he’s already judged how much money you have with you based on your dressing, composure and diction (Similar to what Taxi-Drivers would do). Alternately, you-the buyer-has nothing but the glint in your eyes that says you really want those shoes and hopefully, the money to pay for the pair of shoes.

Moreover, every producer already has an average price per commodity and he won’t accept any payment lower than that price. Now, that gives him way more leverage than you, the buyer. As I illustrated above, he’s the one who’s always got more information on the commodity. The buyer’s usually in the dark about what factors constitute the price of the commodity.

Given the level of asymmetry or ‘unevenness’ in the knowledge of the transaction between the buyer and seller, this is where anchoring effect comes in. Anchoring effect describes the common human tendency to rely too heavily on the first piece of information offered (the “anchor”) when making decisions. That made no sense? I’ll illustrate…In 1974, Amos Tversky and Daniel Kahneman conducted a study on anchoring effect. They asked people to estimate how many African countries were part of the United Nations, but first they spun a wheel of fortune. The wheel was painted with numbers from 0 to 100, but rigged to always land on 10 or 65. When the arrow stopped spinning, they asked the person in the experiment to say if they believed the percentage of countries was higher or lower than the number on the wheel. They then asked people to estimate what they thought the actual percentage of nations was. They found people who landed on 10 in the first half of the experiment guessed around 25 percent of Africa was part of the U.N. Those who landed on 65 said around 45 percent. These people had been locked into the anchor: the first number from spinning the wheel. These researchers just figured out what Igbo traders have been doing since the inception of time. I bet you felt happy when that seller conceded to your price of 8,000 Naira rather than the 11,000 Naira price he asked for. Sorry to burst your bubble, you most possibly fell for anchoring effect.

 

How can you reduce such anchoring effect? You can ‘try’ to reduce anchoring effect by taking a figure that’s ridiculously different from the anchor amount, and then calling it as your price. This way, you’re not ‘anchored’ to the seller’s price. If he calls N1000, you call N300 to break free from his anchor. (Be careful with this though. People tend to get insulted! A taxi-driver once instantly drove off in anger when I called a low price. He didn’t even bother to negotiate!..I had to wait 45 more minutes to get another taxi!) Another method is to call the price you’re willing to pay before the seller does. This way, you’re anchored to your own price and not his.

POST-DISCLAMIER: NO SPECIFIC ETHNIC GROUP WAS TARGETED DURING THE WRITING OF THIS POST! 😉

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  • Wow. Interesting piece and educative too. Truth is, no seller will ever agree to trade at a price that is lower than the cost pf purchasing his goods. Some even go ahead to double the cost price, knowing well enough that the customer would likely not think to beat it down that much. And so experience has taught me that when dealing with traders of this sort, i.e the ones that can be found by the roadside and in market places, you call at least half the price of whatever it is they say initially and start your bargaining from there. I have an aunt who would actually go lower than half price. It’s funny sometimes and annoying at other times. Anyways, I’m not trying to write a new post of my own. Nice job. Keep writing. Cheers

  • This is a wonderful well thought reality in Nigeria, thanks for the share of the knowledge

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