Psychology of money part 2
About this video
Sal explains two more biases that affect money decisions. Anchor bias makes a price look like a great deal because you were first shown a higher price, and confirmation bias leads you to look only for evidence that supports a belief you already hold.
You'll be able to
- explain how anchor bias can make a price seem like a bargain.
- explain confirmation bias and how it affects research before buying.
- spot these biases in sales and in my own decisions.
Key words
- Anchor bias
- Judging a price against a first number you were shown, so a lower price seems like a great deal even if it is just the normal market price.
- Market price
- The usual price something sells for, such as what other stores charge for the same item.
- Original belief
- A belief you start with before looking at the evidence.
- Confirmation bias
- Paying attention to information that supports what you already believe and ignoring information that doesn't.
Transcript
- So, let's talk about a few more biases that might creep in when we start thinking about money. One is an anchor bias. Now, an anchor bias is where if initially you think something is worth more, say, and then all of a sudden that you find out that it costs less, you might get all excited about it, even though that just might be the right market price.
And people sometimes use this to sell things to you. So for example, let's say you go into a store and they tell you that this shirt is $50 and you're like, "Oh, that's kind of a pricey shirt." But you're like, "I like that shirt and $50. "I dunno if I can do it."
But then they say, "But because you're a good person "and you really seem to like that shirt, "for you, I will give it, I will sell it to you for $25." Now, the anchor bias could kick in 'cause they helped you perceive it to be a $50 shirt. And so, all of a sudden, if you think it's a $50 shirt and if you can now buy it for $25, you think you're getting a great deal.
Now it turns out that the store right next door might be selling that exact same shirt for $24, but maybe they're not able to sell as much because they're not anchoring people on that higher price. So, it's a type of psychology that oftentimes comes into things like sales, where you think you anchor on a high price and now all of a sudden you're like, "Wow, I'm getting a great deal on this.
"Let me get it." Now another, and maybe this is somewhat related, is known as original belief. And this is related to another type of bias that sometimes people will call confirmation bias. Where if you start with a belief about something, that something is a good decision or a bad decision, it's oftentimes human nature to pay attention to data that confirms that belief.
So, let's say for whatever reason you think that you need to buy a motorcycle, you know, maybe one of the other biases came into it. All your friends are getting motorcycles or whatever. So, you've come to a belief that you need to get a motorcycle. Now, you start doing web searches on reasons to buy a motorcycle.
And you find all of these articles about, well, you use less fuel and you get the wind in your hair and you know, well, you should wear a helmet. All of these good things about it. And you're like, "Okay, see, look, there's evidence "that it's good for the climate or whatever, "I should ride a motorcycle."
But you might ignore some of the other data points that, hey, it actually could be quite dangerous and noisy or whatever else. You know, motorcycle riders out there, I'm not saying it's always dangerous or always noisy, but you get the idea. We tend to look for data that backs up an original belief, the thing that we already wanna believe.
So, watch out for these things when you're making your own decisions, in life generally, but especially when we're talking about money.
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