Anchoring Effect Essay

IntroductionIn real life, decisions made by individual atomic number 18 easily deviated from the judging criteria, showing the behaviors of bound rationality. Simon indicated that the bound rationality is a property of an agent or a person who makes decisions that behaves in a sort that is nearly optimal with respect to its goals and resources. (Franco 2009) This is because of, firstly military personnel being have limited discernment and cognitive ability, alike humanity ar unable to know everything secondly the environment is complex, when people face the intricate and uncertainty would, info is not complete due to vast uncertainty choice. Moreover, the rationality outhousenot play a role because of people are likely influenced by contrary situations. The report would analyze three concepts which are rational accounting, anchoring effect and confederacy fallacy to help to generate a better understanding of bounded rationality.Anchoring effectBehavioral economics is on the strength of the science of judggenial heuristics that could be to depend on reflexively by people. tally to Furnham that heuristics are characterized as an intuitive, rapid, and automatic system which reduce the complex tasks of assessing probabilities and predicting prys to simpler judgmental operations (Furnham 2010)The anchoring effect is champion of the cognitive heuristics. Anchoring effect is a bias which people easily commit on the information of first impression as fictional character frame when fashioning decisions. The first constitution of information or previous information, as an anchor, could affect current performance that information world power be not highly applicable to the information judgment or even irrelevant thought. Also ain attri just nowes and characteristic which are more deemed to an anchor are fixed and constant.The early(a) respondent is a salesman in a Sony store. Last week I went to city Sony store, a customer who looks like a stu dent was looking for a brand new estimator. Firstly one shop assistant briefly introduces distinct type and function of computers, the student expresses a strong purchase intention. Then the shop manager came and bear more detailed introduction of computers performance. Finally this student made her choice and startedbargaining. stalemate in their time, the shop manager said he is going to report to their boss to find turn out whether she prat get more discount. After few minutes he walked up and said that is the last(a) price, what they can do is offer her some breaks. The student was very satisfied and made payment. At this point, the computer engineer came when started to install the computer, and told her whethershe demands a protection film to protect the screen, otherwise it is easy to scratch, to a fault keyboard cover etc. The student felt make sense. At the end, she not only purchased computer, precisely also some accessories.This is typically anchoring effect. Cu stomer would feel minute if the shop manager promotes those accessories before they purchase computer, they might increase bargaining power and would not easily pay. yet after customer paid for computers, they are giveing to choose accessories because they feel accessories is relatively cheap compare to the expensive computer, moreover they do need these accessories. In general, the numbers which initially provide would affect consumers answer. Experienced salesman always offer a high price before bargaining, accordingly a higher(prenominal) anchor exists in people mind. Seller fetches higher price even that consumer try to bring the price down. There is another example, which is when a business launches a new product, they will carefully discuss the positioning promotion plan, such as which good shelf the products should be placed in. If a new drink is published and placed beside Coca Cola and Pepsi, consumer would accept its high price and visa versa.Anchoring effect is every where and inevitable. So how to avoid falling into anchoring effect can help consumer become a better financial planner. Firstly, putting forward an affordable price at the start when negotiation, with the purpose of offering an anchor to the interchangeer. Besides buyer should notice that the loss of could not sell products is much more than the loss of a low price deal for seller. However refusing negotiate is a more wise than bargaining when face an unreasonable high price, it helps consumer to build a hopeful reference standard.Mental AccountingMental accounting was proposed by Behavioral Science Professor Ric fractious Thaler, he believes, mental accounting is the set of cognitive operations used by individuals and households to organize, evaluate, and keep track of financial activities. (Thaler 1999)In other words, except financial accounting, there is another managerial accounting exist in peoples mind, which called mental accounting, to influence people to make decision in real life. Consumers usually divide some(prenominal) expenditure and income of equal value into incompatible accounts. For example, we usually put salaries into hard to get rich account, wishing annual bonus as an added gift, and put a winning lottery into pie-in-the-sky account. The money in the hard to get rich account is expensed precisely and carefully for annual bonus, we often have relaxed attitude to care for it, for example, we might go to shopping center to purchase an expensive dress as a gift which are reluctant to spend money to buy at ordinary times. The money in the pie-in-the-sky account is the most valueless, imagine that people who win five million dollars would become openhanded and extravagant. This is howmental accounting works.My friend went to a fashion store and alsok a fancy to a very beautiful dress, but it costs about $320. She thought it is too expensive and gave up finally. But in her birthday party, her preserve bought that dress for the birthday gift. It makes her very happy.In fact, her money and her husband money are the familys capital, but why she feels different with the same money spending according to different reasons. This study finds that the expenditure of mental accounting can be divided to four parts, which are daily necessities expenditures, home contribution expenditures and personalised development expenditures, expenditures of mad connection and recreational expenditures. According to irreplaceable of mental accounting, $320, as daily necessities expenditures, is too expensive to purchase a dress, however, the husband purchase it as a birthday gift which can be treated as expenditures of emotional connection. This amount of money can improve their relationship, so rewards are priceless. Consequently, people are willing to accept giftsfrom their family or friends, but they will not purchase for themselves.According to above example, emotional connection and interpersonal relationship is significantly impor tant for human beings, the investment of emotional for people is much more than other expenditures in everyday life. As a consequence, merchants could use these different festivals such as mothers day, Christmas etc. to gain bigger sales. For example, a beautiful engrossed chocolate in Saint Valentines Day, coupons in Christmas, these special offers is negligible for merchants, but it can take in more consumers attention.In usual, most of us could be influenced by mental accounting we have different attitudes to handle the equivalent value of money, hence different decision comes out. From the point of view of economics, there is no any difference among salary, bonus and lottery, but people make three different decisions when spending them. join fallacyTversky and Kahneman believe that the representativeness heuristic is a means of assessing the chance of an uncertain offspring or the value of a quantity by comparing it to a mental model (Berendsen 2012) society fallacy is one o f the result that causes by representativeness heuristic, which states the declare that there are two independent fonts, the luck of both events will happen cannot be higher than the probability than one of the events alone will happen.I made 20 questionnaire surveys and handed into Finc6013 lecture. The question is that the probability of healthy man who have snapper disease is higher or the probability of healthy men who are over 55 years old and have heart disease is higher. There are 6 students elect B and only 14 students chosen A. I was surprised that the result of this question is against the results of Linda problem. People think an event with more materials and details is more likely to happen. In fact it was not the case every added detail makes things uncertainty. Two events can be happenedindependent or conjunction, the probability of conjunction events happened cannot higher than the probability of any independent event occurs. However in reality, people sometimes lin ked probability and quantity together by mistake when making decision, they consider that there is a higher probability of conjunction events. According to the investigation result above, there are three reasonable defenses for conjunction fallacy. Firstly the representativeness heuristic is identified as the cognitive tools effectual for evaluating subjective probabilities.The conjunction fallacy is attributed to the representativeness heuristic. It states that if the probability that the event is included in a classification is contumacious by how representative the event is of include in this classification. Consequently the conjunction fallacy proceed when the confederacy events is rated as more representative of the aimed classification than either the event alone. Conjunction fallacy can be occurred both in situation whether heuristic is applicable. Hence conjunction fallacy might have no any relationship with the heuristic. Secondly, there is an argument that informant mis conception the investigative mission representatively used to study the phenomenon when investigator is doing survey. However it is undeniable that there is value for the investigation, for example some high quality levels of conjunction fallacies are surveyed, and misinterpretations are appropriately controlled in the survey.Thirdly informants are likely to use an incorrect rule to jib rise to conjunction fallacy happen when associating the probability of single events. There are some experimental results shows those informants assume the probability of conjunctive events is equal to the weighted average of the probability of event alone. Therefore if the probability of even A is rated to be greater than the probability of event B, but lower than the probability of event C, informants might debate that the probability of conjunction event A and B is lower than the probability of event A, however meanwhile they consider the probability of conjunction event A and C is greater than the probability of A. This is regard as conjunction fallacy effect. The reason is informants use an incorrect rule for combining probability.Conjunction fallacy is increasingly questionable, it is common phenomenon though when people making decision in reality. On the buns of thecharacteristics of perceptual selectivity, the characteristics of information are more distinct and stimulation is stronger, people are more sensitive to their perception. Moreover, situational circumstances can influence humans perception. Because decision making is conducted on the basis of humans perception, the general and specific information and situational circumstances play a significant role on peoples decision making behaviors. (Nilsson 2010)ConclusionAlthough science and technology are advancing, and research measures of human being is always improving, to some extent, mental process stays at hypothetical stage up to now. This report discussed three decision making trap which are mental accounti ng, anchoring effect and conjunction fallacy. No matter which decision people try to make, it is important that they are supposed to search more information to choose the best alternatives, then they are able to gain experience through every decisions. partBerendsen, A., Hadilich, S. and Amersfoort, J.2012, Looking at Linda Is the Conjunction Fallacy Really a Fallacy?, viewed 27 March 2014,Franco, R. 2009, The conjunction fallacy and interference effects, Journal of Mathematical Psychology, vol. 53, no. 5, pp. 415-422, viewed 30 March 2014,ScienceDirect,Furnham, A. 2010, A literary works review of the anchoring effect, The Journal of Socio-Economics, vol.