Do you recognize the effects of anchoring in decision making?

Anchoring is a cognitive bias where an initial piece of information (the "anchor") heavily influences subsequent judgments and decisions. This bias can infiltrate various aspects of our lives, including workplace interactions and negotiations. Recognizing how anchoring works is crucial to making informed and unbiased decisions. Custom software is difficult to estimate and using an anchor too early or without the necessary rigour can create issues.

For example, in meetings, it's vital to be aware of anchoring, as the first opinions can shape entire discussions. Seniors and experts can influence a meeting's direction and create anchoring effects; therefore, they should offer their ideas last.

Video: Jeff Bezos: Truth is uncomfortable | Lex Fridman Podcast Clips (6 min)

Negative impacts of anchoring

An anchor can limit adaptability, making it harder to find mutually agreeable solutions. For instance, a developer’s best guess on a project budget might discourage the client from choosing your solution looking for other options that could be better suited and more cost-effective.

Key reasons to avoid providing an anchor

Limited information: Early estimates often lack the detailed requirements and complexity analysis needed for an accurate price. Setting an anchor prematurely creates a false sense of precision and sets unrealistic expectations
Loss of flexibility: A strong initial anchor can stifle negotiation and make it harder to adapt your proposal as more information becomes available. This can hurt your ability to arrive at a price that's fair for both you and the client
Damaged trust: If the final estimate varies significantly from the initial anchor, it can erode the client's trust in your process. Transparency and an open discussion of uncertainties upfront are key to building a strong client relationship

How to deal with anchoring

Sales need to establish the client’s anchor, if they have one, by asking:

"Can you describe the process you need improved and its main challenges?"
"How does this issue impact productivity or costs?"
"What's your decision-making process and who's involved?"
"What's your timeline and budget for a solution?"

When asked for an early estimate on a new project, a developer might say "I reckon it'll cost around $50,000". This off-the-cuff estimate sets an unverified anchor that might restrict further discussion and lead to budget constraints based on a premature guess.

Figure: Bad example - Premature estimation without due diligence can lead to inaccurate budgeting and client expectations

Conversely, when asked for an early estimate, a more experienced developer might respond, "To give you an accurate estimate, we should conduct a Specification Review where we can consider all aspects of the project. This way, we can provide a detailed and reliable estimate that reflects the project's complexity".

Figure: Good example - Suggesting a Spec Review ensures that any estimates provided are well-informed and considered

Key Takeaways

Be aware of how anchoring bias can influence decisions, both within yourself and others
Proactively seek diverse perspectives to mitigate the bias
Approach initial information critically, even if it seems compelling, to avoid getting overly 'anchored' in one viewpoint
Use anchoring strategically for setting expectations or initiating negotiations, but be prepared to adjust as needed

Meetings