Chapter 10logo.png

How much is it? (anchoring)

In western culture we have been conditioned to accept the marked price of goods. While it is necessary to negotiate on big ticket items such as cars and houses, we tend to think that there is little practical scope to negotiate prices in most stores. However, when travelling overseas we may encounter different cultures, and many of us have difficulty dealing with merchants for whom every price is negotiable. This is because the merchant will employ one of the oldest, and most difficult to counter, cognitive biases.

Consider Margaret. While travelling in Mexico, she was attracted to the unusual local handicrafts being sold in markets and in the street. Margaret had no concept that the price of everything in this environment is negotiable. She was accustomed to a simple decision-making regime: she found the marked price on something she wanted to buy and decided whether or not to buy it.

In a Mexican market Margaret saw a particularly attractive handicraft that she wanted to take home for her sister. Finding no price tag on the item, she screwed up her courage and asked the merchant what it was. The merchant told her 625 pesos. Now Margaret thought she was on familiar ground: she was either prepared to pay the price asked or she was not. Margaret decided that the price was too high, although she had nothing to go on, having never come across ...

Get Think Like the Great Investors: Make Better Decisions and Raise Your Investing to a New Level now with the O’Reilly learning platform.

O’Reilly members experience live online training, plus books, videos, and digital content from nearly 200 publishers.