Understand the anchoring effect (the first number pulls your estimate toward it) and the availability heuristic (what's easier to recall seems more common).
Anchoring effect
The first number decides for us
The anchoring effect is the pull that the first number we come across has on our later estimate, even if the number is random and irrelevant.
A classic experiment by Kahneman and Tversky: people were asked to estimate what percentage of African countries are in the UN. But first a wheel of fortune was spun in front of them (rigged to land on 10 or 65). Those who got 10 named ~25% on average, and those who got 65 — ~45%. A completely random number from the wheel shifted the estimate! That's the anchor.
Where it hits your wallet:
— A crossed-out “old price” of $9,990 next to a “new” $4,990 is an anchor that makes the second price look like a bargain.
— In negotiations, whoever names a figure first sets the anchor that all the haggling revolves around.
— A “suggested” donation or tip amount pulls your choice toward it.
The antidote: when you notice a number, ask where it comes from and whether it's connected to reality. It helps to make your own estimate BEFORE you hear someone else's figure.
Lesson notes
The first number decides for us
The anchoring effect is the pull that the first number we come across has on our later estimate, even if the number is random and irrelevant.
A classic experiment by Kahneman and Tversky: people were asked to estimate what percentage of African countries are in the UN. But first a wheel of fortune was spun in front of them (rigged to land on 10 or 65). Those who got 10 named ~25% on average, and those who got 65 — ~45%. A completely random number from the wheel shifted the estimate! That's the anchor.
Where it hits your wallet:
— A crossed-out “old price” of $9,990 next to a “new” $4,990 is an anchor that makes the second price look like a bargain.
— In negotiations, whoever names a figure first sets the anchor that all the haggling revolves around.
— A “suggested” donation or tip amount pulls your choice toward it.
The antidote: when you notice a number, ask where it comes from and whether it's connected to reality. It helps to make your own estimate BEFORE you hear someone else's figure.
What's easy to recall seems common
The availability heuristic is the habit of judging how likely an event is by how easily examples come to mind. The more vivid and recent the memory, the “more common” the event seems.
The problem is that ease of recall depends not on real frequency but on vividness, emotion, and what the media show. A plane crash, a terrorist attack, a shark attack are rare, but the news shouts about them; they're vivid and scary, so they come to mind easily — and seem far more likely than they are.
Examples of the bias:
— People fear planes more than cars, although per mile traveled, the car is statistically more dangerous.
— After a news story about a burglary, a person overestimates the crime rate in their neighborhood.
— Many people think there are more words that start with the letter K than words with K in the third position, simply because words are easier to recall by their first letter (in fact, there are more words with K in the third position).
The antidote: ask not “Can I easily recall an example?” but “What do the numbers and statistics say?”