You're selling a house in Lexington, Massachusetts. The 1,100 square foot house has 3 bedrooms, 2.5 baths and an attached 2-car garage. The house is in a great location. Lexington is known for having a strong public school system and the house is adjacent to conservation land making a 7,500 square foot lot feel more like a 10,000 square foot lot. There's also an empty 4,600 square foot lot next door, which is too small to build on. But a developer could buy both lots, tear down your place and build a larger house. What are the comps? In the neighborhood, houses sell for about $340 a square foot. Making your house worth about 375,000 plus the value of the bigger back yard. However, a tear down house on a similarly sized lot, but not near the conservation are recently sold for 540,000. This suggests the highest value would be to sell to a developer. So how much should you list your house for? Before you input your asking price, I'd first like to establish if it's above or below a certain number. Take the last three digits of your phone number. Or if you like, find a dollar bill or your favorite other currency and take the last three digits of its serial number and input it below. It should be clear that your answers to questions one and two should have had no bearing on the ideal listing price you provided in question three. The last three digits of your phone number are entirely random, as far as I know. If your phone number ends with 235, you would've been asked if your listing price was more or less than 235,000. Obviously, more. If your phone number ends with 928, then was it more or less that 928,000? Almost surely less, which question you were asked shouldn't convey any information about what the right listing price is. And yet, many people use the fact they had to consider setting their price above or below a specific number as an indication of the house's value. This is called anchoring. If the anchoring effect is shown up in our experiment, the last three digits of your phone number will have had a significant impact on your asking price. Here is what anchoring theory predicts. The first number you hear will serve as an anchor or starting point. Thus, if you hear 235,000, this will drag down your view as to the right starting point. Similarly, if you hear a high number like 928,000, this will pull-up your view as to the best asking price. Since the starting point in question one, phone number digits convey no information. It should have had no impact on the price to ask. I'm doing this before you've all taken the survey, but here's my prediction. The amount you asked for should go up based on which group you're in. Those with the lowest phone numbers should ask for the least and those with the highest phone numbers should ask for the most. This experiment's a bit tricky, as I won't be able to demonstrate or refute this effect until a few hundred of you have completed the survey. In the mean time, let me share with you some results from the literature. One of the first demonstrations of anchoring came from Amos Tversky and Daniel Kahneman in a 1974 paper published in Science. Kahneman went on to win the Nobel Memorial Prize in Economics in two 2002, which Tversky likely would have shared had he not died beforehand. In one of their experiments, subjects were asked to estimate the percentage of African countries in the United Nations. But before answering the question, something like a wheel of fortune with numbers 1 to 100 was spun in front of them and subjects were asked if the percentage aas above or below the number that came up. For example, if the wheel landed on ten, the subject was first asked if the percent of African countries in the UN was above or below 10%. In the follow up to the 10% question, the median estimate of African countries in the UN was 25%. In contrast, if the wheel landed on 65, so the first question anchor on 65%, then the median subject estimate grows to 45%. The estimate goes from 25% to 45%, just based on the anchor effect of the first question. I believe the correct answer is 30%. The anchoring effect seems to exist, even when the anchors are widely implausible. In 1997, Fritz Strack and Thomas Mussweiler. Two psychologists at University of Pittsburgh asked subjects to estimate what year Albert Einstein first arrived in the United States? Those who were first asked, if Einstein arrived before or after 1215, yes. 1215, the year of the Magna Carta. Provided statistically lower responses than those primed with 1992, which is 37 years after Einstein died. Either way, Einstein first arrived in the US in 1921. The real estate experiment we did was adapted from a 1987 paper by Professors Gregory Northcraft and Margaret Neale. In their study, subjects were given a listing sheet about a house and even allowed to visit it. Unbeknownst to the subjects, they were given four different listing prices ranging from 65,900 up to 83,900. Those given the highest numbers inferred, but the house was worth $6,000 more and raised the minimum bid they would accept by more than 7,000. Of course, house listing prices typically convey information. A seller who picks a higher listing price might be more patient and know there's something extra desirable about the house. In real life, it can be hard to distinguish between an information effect and the anchoring effect. That's why in our experiment, I just asked if you would list the house for more or less than the last three digits of your phone number in thousands. There's no information conveyed, just a random number. Assuming our survey went as predicted, here's the lesson. The numbers people hear at the start of a negotiation will anchor where they end up. Thus, if you have the opportunity to make the first offer, a low bid may help you lower the final price. If you're selling, a high asking price may help you get more money. This is one of the advantages of going first. At the same time, if you're on the receiving end and the other side presents you with a low first offer or high ask, you should be aware of the anchoring effect and consciously counter it. I'd like to think that if we did our experiment again, this time your phone number wouldn't effect your answer. That said, let me offer two qualifications. First, starting too low or too high may be counterproductive. When you make an offer, it conveys both information and an anchor. In the case of the Lexington house, if as a seller, you started with an asking price of 928,000. Buyers might think you're out of touch and wouldn't bother to bid, as it would be a waste of their time. Conversely, if as a buyer, you would start with a low ball bid of 235,000, it would demonstrate that you have no idea what the house is worth. Or worse, that you do and are trying to steal the house from the seller. He or she would likely reject your bid without a counter and may not wanna entertain bids from you in the future. Or you'll have to significantly raise your bid and then have no credibility when you suggest, this really is the highest you'll go. In other words, trying to do overdo the anchor may end up sinking you. Second, in some cases, a low anchor might actually help you get a higher price. The reason is that it brings more people into the bidding. That's why on eBay, you'll see many auctions for luxury cars where the bidding starts at a nominal amount even though the price will surely end up way above that. For example, Michael S. Listed a loaded 2013 BMW 328i convertible with under 30,000 miles with a starting bid of $200, that's a crazy low number. And yet, the possibility of getting a great deal helped Michael attract nine bidders. The price quickly rose to 10,000 and then to 20,000 and 23,000 over the next 4 days. The car ended up selling for 25,100. The $200 opening bid likely had little anchoring effect, but it helped raised the price by attracting the attention of a large number of bidders. So if you can, go first and try to anchor expectations with your initial price, but don't go overboard and chase away all the potential buyers. Oh and if you're curious, my cousin was the seller of the house in Lexington. There were several developers who were interested and the final price was 673,000.
