Exploring the Anchoring Effect: Theories, Mechanisms, and Real-world Applications

Abstract

Behavioral economics, interlinking economics, psychology, and cognitive science, explores economic decisions through the prism of cognitive, emotional, and social influences, opposing the rationality presumed by traditional economics. This article delves into a predominant cognitive heuristic, the anchoring effect, highlighting its enduring influence on judgments, even when the initial anchor is irrelevant. The domains explored include consumer behavior, showing misalignments between espoused rationality and actual choices, and how the anchoring effect amplifies this discrepancy. This paper investigates applications of the anchoring effect in pricing mechanisms, illustrating how companies leverage it to influence consumer perceptions and choices, and in financial markets, demonstrating its role in investment decisions and market valuations. Further, it examines the anchoring effect in public policy, revealing its utility in environmental initiatives and charitable giving. The article culminates in an exploration of the multifarious theoretical underpinnings of the anchoring effect and accentuates its ubiquity and substantial implications in various facets of human behavior and economic decision-making.