Behavioural Economics - Anchoring

Behavioural Economics – Anchoring

hi there welcome to another in our series of short videos on behavioral economics in this session will focus on anchor a few months ago Cafe Rouge decided to put on their menu an enormous 32 ounce bowls heads steak here's how that steak looked in the ranking of size of steaks and offer to consumers all the way from the 5 ounce minute bump through to the big 32 ounce one and you'll need to know that this 32 ounce steak was 45 pounds so what was going on here well the behavioral economist would perhaps suggest that the 45 pound 32 ounce steak is not necessarily one that Cafe Rouge would expect to sell a lot of essentially what they're doing here is it inserting perhaps for most consumers on largely irrelevant piece of information as a kind of reference point because that might actually influence the decision or choice that people eventually make when they're choosing off the menu at Cafe Rouge you see the 45 pounds steak could conceivably meet that instead of choosing 7 or an 8 ounce filet torso lawn steak consumers might be tempted to nudge the decision towards the 15 ounce ribeye on the bone the 45 ounce 40 to 45 pound or 32 ounce steak is a huge difference between the two but it then puts in context 15 ounce which appears to be relatively smaller and this is what we mean by anchoring anchoring is when businesses or people use an anchor point of cooking events could be a price of value that they know in order to make a decision or an estimate so an anchor is a value or an imprint in our mind which we then use as a kind of mental left-hand point when making a choice some cases the anchor establishes in our mind a low price think for example the entry of McDonald's into the kind of retail coffee market a decision to choose a sort of 90 ANP price for a standard cup of coffee so there are different price to the the classic sort of two pound 15 or two pound 20 for a flat white at cost a coffee so Starbucks and Koster may have a different anchor to my Donald's other other big examples are in the in the sporting world that the anchor could be the the size of the home crowd acts as a kind of anchor for refereeing decisions over the course of a season companies such as taxi companies and restaurants they may use anchors and sort of recommended tips recommended tips of 5 percent or 10 percent probably the basis by which the decision is make is made now in the housing market for example people use the lowest minimum prices and comprise of let's say four hundred thousand pounds for house in West London for example so anchors are basically bits of information they used as reference points when people are making a decision and if people do use anchors that is known as a cognitive bias a behavioral bias which we need to factor into account businesses need to choose carefully their anchor price because once that becomes indelibly imprinted in people's minds it's quite hard to change the anchor price becomes a key decision for businesses and it's an important part of behavioural economics

2 thoughts on “Behavioural Economics – Anchoring

  1. If you find this video helpful, don't forget to like it! and SUBSCRIBE TO the tutor2u Channel to be alerted as soon as we've uploaded new topic videos like this one.

  2. This is GREAT! It is like having David Attenborough on a nature-documentary, except it is about economics instead

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