By Craig Erwin, Ph.D.
When you buy a house or car or negotiate a price on eBay, you are probably unaware that you have an anchoring bias, a tendency to become anchored to the first number you see, the anchor. It is likely that you will make an offer based on an item’s advertised price (the anchor), not its fair market value. If you negotiate, both you and the seller will have a hard time moving far from the anchor. If a car is listed at $10,000, it is unlikely that you will offer $5,000 because you will be anchored to the $10,000 price listed in the ad.
Anchoring can cost you. For instance, a seller might list a car’s price far above its fair market value. It’s likely that both you and the seller will anchor at the advertised price, instead of the Blue Book price. If you negotiate, both of you are likely to make offers and counteroffers based on the advertised price (the anchor).
Anchoring also applies to tips. Square found that, on average, Americans tip 16.4% of their check, which amounts to an estimated $40 billion each year. So, how does anchoring work for tips? Many restaurants list suggested tip amounts in a tip menu. You will likely be anchored to the amounts on the tip menu and select a tip from the tip menu.
In a study of New York taxi tipping, Stanford Professor Kwabena Donkor found that providing three menu options for tips increases the average tip by 11% (compared to providing no tip menu). He also found that, although riders generally like tip menus, they rebel if tip menu options are too high.
Although you may be happy that service providers suggest tip amounts so you don’t have to do any math, you may spend more than you like. When confronted by a tip menu, you may hastily pick an option, but later regret it, knowing the service you received did not warrant an above-average tip. Over time tips add up, much like buying an expensive coffee every day. Saving and investing instead of over-tipping can sweeten your retirement savings.
You probably like to tip well when you receive excellent service and less well when the service is substandard. Beware, anchoring may push you to tip more than you would like. Over time anchoring can cost a lot of money, whether you pay more for a car or house or tip more than you need to. If you like being a big spender, that’s your right, but at least make sure you understand how anchoring tugs at your purse or wallet.
Do you think anchoring affects you? How often do you eat out? How do you decide when to tip and what to tip?
For more information on saving, spending, and investing, click on the following links: