The Advisor Asks: July 2018

The Advisor Asks: July 2018

What Was I Thinking?
By Mary Johnson, editor, and Terry Newell, President, Leadership for a Responsible Society

Why does decision making have to be so hard?  How much time is the right amount to spend on thinking things over?  Can you even name anyone who never made a bad decision?  We can’t either.

Often, the most consequential decisions are those we make only once or twice in a lifetime.  But decision – making itself is a skill that takes practice.  That means we can get better at it.  Even with practice though, it’s almost impossible to forecast whether our decisions will work out.  Often there are hidden factors at play, influencing our decisions, of which we may not even be aware.  Learning about how our minds could be sabotaged, and how we could be nudged in wrong direction, can help us improve our decisions.  One of these nudges is called the “anchor effect.”

Recently I had a chance to learn how to do a better job at decision - making by taking a course through the Osher Lifelong Learning Institute at the University of Virginia.  Instructor Terry Newell’s work focuses on values-based leadership, ethics, and better decision making — skills for which there is very high demand — but all too short supply.  Here are some insights from Dr. Terry Newell:

Mary:  What is the “anchor effect" and could you give an example?

Terry:  The anchor effect is the psychological tendency to rely too much on the first piece of information we get in the process of making a decision.  For example, when you go to buy a house, the list price becomes the starting point (the "anchor") for negotiations, even if it is a very poor reflection of the home's true value.  When you get a solicitation for a charitable donation in the mail, it often lists suggested contributions, starting with the highest figure they hope you will select.  That high figure becomes the anchor for your thinking about what to give.

 Mary:  How does “anchoring” impact our decision-making?

Terry:  The anchor takes on too much weight, swaying the decision in a particular direction.  It can lead us to ignore or never even consider other options.  In buying a used car, the sales price may be much higher than the car is worth.  Yet we start there in haggling over what we'll pay, possibly paying only somewhat less than the price, and thinking we got a good deal when we did not.  In the case of the charitable donation, we may feel guilty the more we consider giving less than the anchor ("suggested") amount.

Mary:   Who tends to use anchors to influence our decisions, and when should we be wary?

Terry:  Anchors are used in many settings — for example, by sellers of goods and services (e.g. home renovation estimates).  They are also used in public policy discussions.  When someone at the local, state, or federal level suggests a policy or piece of legislation, that opening proposal becomes the anchor around which people negotiate.  Other options get far less attention - or may not even enter our minds.  Be wary when making a decision in which someone else has created a choice that seems in his or her favor but may not necessarily be in yours.  Never make a decision without considering other options.

Terry Newell currently teaches leadership, decision - making, and ethics courses for a variety of organizations.  He is the former dean of the Federal Executive Institute in Charlottesville, Virginia, and was the director of the Horace Mann Learning Center, the training arm of the U.S. Department of Education.

Learn how the “anchoring effect” may impact choosing the age to claim Social Security benefits here: “What’s Secretly Sabotaging Your Finances? — Your Brain”