Your Subconscious Might Not Know Best

Some financial commitments come with a big price tag — such as a house or a car. Researchers know that the first price customers hear is the one that sticks in their heads — it’s a human tendency called anchoring. For example, if you are looking at interest rates for borrowing to build an addition on your house for your growing family, your mind will think that the first rate you see is the “right” one, and you can end up paying more than you have to. Fortunately, if you understand how anchoring works, you are in a good position to outsmart it and make a better decision.

According to Investopedia,[1] anchoring is a mental shortcut used to help people assign value to things. The first price you hear becomes your reference point for evaluation, especially if shopping around seems like one more chore you have to do.

For example, if a store offers a shirt that's regularly $50 on sale for 50 percent off, you will tend to assume it’s a better value than a shirt on display at a full price of $25, even if the two are the same except for how the price tag is formatted. Your subconscious mind will think that something that is 50 percent off is a better deal than a regularly priced item. This is why some stores are always running sales — they want you to anchor your thoughts on the size of the discount rather than the price you will pay.

This principle applies to many financial transactions and to other parts of life. Researchers have found that it even influences how parents set curfews for children (for example, by thinking about their own curfew when they were growing up, which may not be best for their own child). Whatever you hear first sticks in your mind the most.[2]

 

Making This Work for You

When you understand how anchoring works, you can work around it. Start by researching the features you need in a major purchase and use that as a basis for what to buy — not how the price looks relative to the most-expensive model. Your research can also give you an idea of what going rates are before you look at an offer with a price assigned.

If you are looking for a new job or are about to ask for a raise, find out what the range of pay is in the market before beginning the discussion with your boss. Likewise, it is wise to spend some time online looking at appliance prices before going shopping for equipment for your new kitchen.

And when you do go shopping, look at the price you will pay, and not any other prices on the tag. Is the price you will actually pay worth it to you? If a dress is going to hang in your closet because it's not quite your style, it really doesn't matter if it was 75 percent off.

Also, keep in mind that the person who names a price first is not always the loser in a negotiation. That's popular advice, but it can work against you, for example, if you are discussing a pay raise or placing a bid on a house. If you have done your research to know what salaries should be, or where real estate prices are in a given neighborhood, you can develop a more suitable offer.

Learn more about how you can make financial decisions that are in your favor when borrowing money by talking to the financial experts at PNC.

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These articles are for general information purposes only and are not intended to provide legal, tax, accounting or financial advice. PNC urges its customers to do independent research and to consult with financial and legal professionals before making any financial decisions. This site may provide reference to Internet sites as a convenience to our readers. While PNC endeavors to provide resources that are reputable and safe, we cannot be held responsible for the information, products or services obtained on such sites and will not be liable for any damages arising from your access to such sites. The content, accuracy, opinions expressed and links provided by these resources are not investigated, verified, monitored or endorsed by PNC.

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