1. Introduction

Behavioral economics, an interdisciplinary field blending economics, psychology, and cognitive science, seeks to understand the intricacies of individual and collective economic decision-making through the lens of social, cognitive, and emotional influences [1]. Contrary to traditional economic theories that presume rational decision-making, behavioral economics posits that human judgments are often guided by systematic biases and cognitive heuristics [2], such as conditioned reflexes that rely on mental shortcuts and largely depend on background information when making decisions.

Cognitive heuristics serve as mental shortcuts, deployed to simplify complex problems and mitigate cognitive overload [3]. Relying on background information and past experiences, these heuristics enable individuals to make quick, intuitive, and automatic judgments. In economic contexts, such mental shortcuts are often utilized to expedite analyses and investment decisions.

This article will focus on one such cognitive heuristic known as the anchoring effect. This effect refers to the disproportionate weight individuals assign to an initial piece of information [4], or "anchor," when making judgments. Even when the anchor has no substantive relevance, people tend to rely heavily on it for subsequent decision-making. The article aims to delve into the theories, mechanisms, and real-world applications of the anchoring effect, exploring its significant impact on various facets of human behavior and economic decision-making.

2. Discussion

2.1. The Complexity of Consumer Behavior and Dissonance with Rational Choice Models

The domain of consumer behavior is inherently intricate, with individuals frequently postulating that their consumption choices are an epitome of rationality, coherently aligning with their espoused values, attitudes, and intentions. Nonetheless, an extensive body of empirical evidence sourced from psychology and behavioral economics posits otherwise [5]. The actual decision-making process manifests substantial discrepancies between individuals' self-reported cognitions and their observable behaviors. Contrary to the tenets of neoclassical economics and the rational choice framework [6]—which presuppose that consumers engage in an objective evaluation of the costs and benefits associated with each available alternative—choices are often far from being optimally rational.

2.2. Cognitive Heuristics and Biases in Decision-Making

Beyond the façade of rationality, human decisions are profoundly influenced by a host of cognitive heuristics and biases, which serve as mental shortcuts or simplified rules of thumb. These heuristics are adaptive strategies that have evolved over time based on experiential learning. While they may increase efficiency, their application often results in systematic deviations from what would be considered rational behavior according to classical economic theories.

2.3. The Anchoring Effect as a Dominant Heuristic

Among the plethora of cognitive heuristics, the "anchoring effect" is particularly salient in behavioral economics. This effect delineates the predisposition of individuals to rely disproportionately on an initial piece of information—known as the "anchor"—when making subsequent judgments or evaluations. Remarkably, this initial anchor retains its influence even when it has no substantive relevance to the decision at hand [7]. Over time, individuals may attempt to revise or adjust these initial judgments; however, these modifications generally fail to mitigate the potent influence of the original anchor. Such phenomena have been corroborated across diverse spheres of decision-making, encompassing financial planning, consumer choices, and beyond.

2.4. Implications and Impact of the Anchoring Effect

The ramifications of the anchoring effect extend far beyond academic interest, exerting tangible influences on multiple facets of human life:

Pervasiveness and Resilience: The anchoring effect is notoriously difficult to circumvent. Even when participants are made aware of potential misleading anchors, this awareness seldom attenuates the heuristic's impact on final decisions.

Longevity and Stickiness: the anchoring effect is not a fleeting phenomenon. Once activated, it exerts a prolonged influence on subsequent judgments and choices, rendering it a persistent cognitive bias [8].

Role in Collective Decision-making: which points out that the conventional wisdom holds that collective or group decisions tend to be more rational than those made individually [9]. However, the anchoring effect complicates this assumption. Indeed, a group's collective judgment can serve as an anchor for individual members, although empirical consensus remains elusive regarding whether group decisions are invariably superior to individual ones.

Economic and Policy Implications: The anchoring effect has meaningful economic repercussions, potentially influencing price expectations in markets and biases in policy-making. Understanding this effect can assist in crafting more effective interventions and policies.

2.5. Underpinning Mechanisms: Theoretical Explanations

The anchoring effect is buttressed by various theoretical paradigms, the first one called “Anchor-Adjustment Theory”, which demonstrated that individuals establish an initial anchor and make subsequent adjustments to it. These adjustments, however, are typically insufficient, causing the final judgment to remain proximate to the initial anchor. The other theory called “Confirmatory Hypothesis Testing” which points out that individuals tend to assess the suitability of the anchor in the decision-making process. Although they may proceed to explore alternative answers, the properties of the initial anchor continue to exert a residual influence [10]. Last but not least, researchers propose the theory called “Attitude Change”, in which point of view, that the act of establishing an anchor can induce shifts in an individual’s attitudes towards the attributes associated with that anchor, thereby influencing future decisions in its favor.

In sum, the anchoring effect is a nuanced and multifaceted cognitive bias whose understanding has broad implications for consumer behavior, public policy. It also prompts further academic inquiry into its underlying mechanisms and potential strategies for mitigation.

3. Application 1: Pricing Mechanisms and Consumer Mindset

When it comes to pricing strategies, anchors (usually the initial price a company sets for a product) can significantly influence consumer perceptions and choices, with research finding that even arbitrary, irrelevant anchors can influence subsequent judgments [11]. For example, the application of anchoring theory to consumer electronics products. In consumer electronics, manufacturers cleverly leverage anchoring by releasing multiple iterations of their products, each with unique features and price points. For example, if an electronic technology company considers an initial price of $500 for a new product, then this initial price can serve as a psychological benchmark or "anchor" for consumers to use for comparative evaluation [12]. The company can influence consumer choice by launching versions of the original product that have similar functionality but are priced higher or lower. For example, a $300 basic version and an $800 premium version might be available at the same time. In this case, empirical evidence suggests that consumers may perceive original products at $500 to be better value for money, with mid-range products offering the best balance between cost and functionality. The most typical case in this field is the world's leading "Apple". As one of the most popular brands in the current mobile phone market, Apple's product pricing in each product quarter will affect the decisions of other electronic product companies.

Second, luxury brands and high-end service providers also often use anchoring effects, but usually for different goals. Unlike a consumer electronics brand that might use anchoring to maximize sales or market share, a luxury brand or high-end restaurant might use a high anchor price to signal quality, exclusivity, or status. In these cases, anchoring can not only serve as a point of comparison, but also serve as a brand positioning tool. For example, a new coffee shop entering the market will locate its store near a higher-priced chain coffee brand, making it easier for consumers to accept it. The emerging brand’s high pricing strategy. In fact, high anchor prices can effectively reflect product quality, thereby justifying cost increases and shaping brand image [13].

Anchoring is a multi-faceted tool in the world of pricing strategy that does more than just help with immediate sales. From a marketing strategy perspective, setting appropriate anchor points can not only affect the sales of a single product, but also affect the market dynamics of the entire product line [14]. Companies often use sophisticated market research methods, such as conjoint analysis and user surveys, to empirically determine effective anchor prices. Anchor’s influence spans multiple industries, including electronics, subscription services, and even food and beverage. Its impact goes beyond shaping consumers’ evaluations of individual products. Anchoring plays a vital role on a wider scale, influencing market acceptance and consumer perceptions of a brand’s entire product suite.

4. Application 2: Investment and Financial Markets

In financial markets, the concept of anchoring is not just a quirk of consumer psychology but a key behavioral bias that affects investor behavior. A large body of research in the field of behavioral finance shows that investors focus too much on specific price levels (often historical highs or lows) as reference points for valuation. For example, a stock that plummets from $200 to $120 may be viewed as "cheap" by investors anchored by the previous price, which may cause them to ignore the real reasons for the stock's price decline, such as company fundamentals. deterioration or adverse changes in industry trends; and other important market information [15], such as fundamental analysis, macroeconomic indicators or upcoming financial reports, etc. Although analysts often employ quantitative methods and predictive models to mitigate these biases, even experienced market participants are susceptible to anchoring. Recent research suggests that this bias is widespread and may result from innate cognitive limitations in humans that often overwhelm rational calculation.

The anchoring effect is also evident in real estate investment. The initial price set by the developer can become a strong psychological anchor for investors. For example, in a rapidly urbanizing area, a real estate development project attracts a large number of potential investors eager to invest. When the developer first launched the project, it set a price of $4,000 per square meter, and used this price as a key part of its marketing campaign, which was widely disseminated in the city through various media means. In this case, the initial price of $4,000 will become an anchor point in the minds of investors for the real estate project as the marketing campaign progresses. Even if market conditions subsequently change, such as nearby infrastructure improvements or the launch of new commercial development projects, resulting in an increase in land prices in the area, or the surrounding public facilities are lagging behind, there are cheaper housing options in the same area; most investors $4,000/square meter will still be used as the benchmark to measure the investment value of the project, leading to differences between investors and developers during the negotiation process. Research in the fields of urban economics and real estate finance has identified this anchoring effect as a potential cause of market distortions, affecting the long-term health and price stability of real estate markets.

In addition, anchoring effects can have knock-on effects on the wider market. For example, if developers adjust prices slightly, even for legitimate reasons such as increased costs or increased market demand, they may be negatively impacted by regular buyers. As research on negotiation theory and market dynamics confirms, resistance to price adjustments due to anchoring can create market inefficiencies. Further, the anchor price can become a de facto benchmark for other developers and real estate agents, amplifying its impact on pricing across the market. This phenomenon can lead to market distortions that reduce the ability of prices to accurately reflect the value of an asset or the risk of an investment. Given the impact of anchoring on portfolio decisions, it is critical that developers and financial institutions carefully consider initial pricing strategies. Investors should be provided with comprehensive and diversified information, investor education should be strengthened, and information transparency should be improved to facilitate investors to make more rational decisions as a mechanism to mitigate the adverse effects of anchoring.

The anchoring effect in financial markets is not just a special behavioral bias, but a general phenomenon with significant economic consequences, ranging from misvaluation of individual assets to inefficiencies in the entire market.

5. Application 3: Public policy and environmental action

Anchoring theory possesses extensive applicability in various public activities, notably in public policy and environmental protection initiatives. For instance, in policy measures concerning sustainable development, both governmental and non-governmental organizations exploit the anchoring effect to modulate human behavior. This, in turn, encourages the public to actively engage in energy-saving activities to achieve the goals of sustainable development. Specifically, within a campaign aimed at energy conservation and emission reduction, when the public is informed by either governmental bodies or organizing entities about a fixed goal for energy conservation—such as a 20% reduction in electricity consumption—this numerical figure often becomes the foundational reference point for people's subsequent energy-saving actions. Individuals tend to adjust their daily energy-saving practices to align more closely with this 20% target. The establishment of such an anchor not only motivates a larger population to participate in sustainable environmental practices but also enhances the efficiency of collective actions.

Similarly, the concept of public welfare anchoring points is evident in charitable fundraising. Charitable organizations typically establish a "base" donation amount—for example, a suggested donation of $20 or more. This benchmark often serves as a psychological anchor for most people, guiding the size of their donations and thereby increasing the overall fundraising amount. Such anchoring strategies have been demonstrated to be effective in various public welfare contexts, ranging from international relief to local community development.

One of the significant case studies demonstrating the anchoring effect in public policy pertains to pension plans. Pension schemes are integral to most people's long-term financial planning. For illustration, consider a hypothetical pension plan named "Sunset Red," which provides multiple investment options, including stocks, bonds, and mixed assets. Upon initially joining this scheme, participants are given an information brochure that details the various investment options and a recommended average annual investment, usually a relatively low fixed figure like $500 per month. This suggested amount inadvertently becomes a vital anchoring point for those involved in the pension plan. Studies reveal that the majority of people take this recommended figure as their starting point for pension investments, often adopting this suggestion without substantial consideration [16]. Even when individuals possess the financial capacity to invest larger amounts for potentially higher future returns, this initial anchor continues to dominate their investment choices.

This phenomenon is not exclusive to a singular pension scheme. Similar behavioral tendencies have been observed in other pension and savings plans as well. Such anchoring effects not only influence individual investment behaviors but also have potential long-term ramifications on a larger socioeconomic scale [17]. If a significant proportion of the population makes lower investments due to anchoring, it may lead to a decrease in overall pension reserves, thus affecting the future quality of retired life. Moreover, because participants often fail to adjust adequately to this initial anchoring point, they may miss other, more profitable investment opportunities, particularly those with higher return potential but relatively controlled risks.

Indeed, the impact of anchoring effects on decision-making within pension systems has sparked important dialogues on improving the design of pension plans. On one hand, enriching educational and informational resources may empower participants to make more informed decisions. On the other hand, altering the manner in which initial recommendations are set—such as employing dynamic anchoring points adjusted according to participants' age, income, and other variables—could mitigate the influence of these anchoring points on individual decision-making.

6. Conclusion

The anchoring effect serves as a psychological linchpin that can heavily bias individual and collective decision-making, regardless of whether the anchor is relevant. Its impact is pervasive and enduring, making it challenging to mitigate even when individuals are aware of its influence. Far from being just a theoretical construct, the anchoring effect has real-world implications that span multiple domains:

In the realm of consumer behavior, companies strategically employ anchoring in pricing mechanisms, affecting not just individual product sales but shaping market dynamics and brand perception at large.

Within financial markets, the anchoring effect can lead to asset misvaluation and market inefficiencies, affecting both individual and institutional investors.

In public policy, particularly concerning environmental action, the anchoring effect is used to guide collective behavior toward sustainable practices, by setting specific, albeit arbitrary, goals.