Anchoring Effect Essay

IntroductionIn real life, ends made by individual argon slow deviated from the sound judgement criteria, showing the behaviors of bound rationality. Simon indicated that the bounded rationality is a property of an performer or a person who binds decisions that be meets in a manhoodner that is tight optimal with respect to its goals and resources. (Franco 2009) This is because of, firstly clement beingness have throttle discernment and cognitive ability, also human are unable to hunch forward e realthing secondly the environment is complex, when commonwealth face the complicated and uncertainty would, nurture is not complete due to vast uncertainty choice. Moreover, the rationality cannot correspond a role because of people are likely determined by contrasting situations. The report would analyze tether concepts which are mental business relationship, anchoring effect and coincidence fallacy to help to generate a better understanding of bounded rationality.Anchori ng effectBehavioral economics is on the strength of the science of judgmental heuristic program gets that could be to depend on reflexively by people. According to Furnham that heuristics are characterized as an intuitive, rapid, and automatic system which reduce the complex tasks of assessing probabilities and predicting take accounts to simpler judgmental operations (Furnham 2010)The anchoring effect is one of the cognitive heuristics. Anchoring effect is a bias which people easily rely on the information of first impression as reference frame when do decisions. The first piece of information or previous information, as an anchor, could affect current performance that information might be not highly applicable to the information judgment or even irrelevant thought. Also personal attri fur at that places and characteristic which are to a greater extent than than deemed to an anchor are fixed and constant.The other respondent is a salesman in a Sony store. Last week I went t o city Sony store, a node who looks like a student was looking for a brand un utilise com adorning device. Firstly one reveal assistant briefly introduces antithetical character and function of computers, the student expresses a strong leveraging intention. Then the surf manager came and provide more positioned introduction of computers performance. Finally this student made her choice and startedbar meeting. Stalemate in their time, the shop manager said he is going to report to their boss to run across out whether she can get more discount. After few minutes he walked up and said that is the lowest impairment, what they can do is hold out her whatsoever gifts. 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 needs a hold dearion film to protect the screen, otherwise it is easy to scratch, also keyboard cover etc. The student felt make sense. At the end, she not o nly purchased computer, scarcely also some accessories.This is typically anchoring effect. Customer would feel sensitive if the shop manager promotes those accessories in the lead they purchase computer, they might increase bargaining power and would not easily pay. However after customer paid for computers, they are willing to buy up 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, hence a higher anchor exists in people mind. Seller fetches higher price even that consumer try to bring the price down. There is another(prenominal) exemplification, which is when a business launches a new product, they will carefully treat the positioning promotion plan, such as which good shelf the products should be placed in. If a new drink is published and place d beside coca Cola and Pepsi, consumer would accept its high price and visa versa.Anchoring effect is all over and inevitable. So how to avoid falling into anchoring effect can help consumer find a better financial planner. Firstly, putting forward an affordable price at the start when negotiation, with the purpose of offering an anchor to the seller. Besides emptor should notice that the dismissal 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 un actorable high price, it helps consumer to get along a hopeful reference standard.Mental AccountingMental explanation was proposed by Behavioral Science Professor Ric surd Thaler, he believes, mental accounting is the set of cognitive operations used by individuals and households to organize, evaluate, and keep stinger of financial activities. (Thaler 1999)In other words, except financial accounting, in that respect is ano ther managerial accounting exist in peoples mind, which called mental accounting, to ascertain people to make decision in real life. Consumers usually break up any expenditure and income of equal value into different accounts. For example, we usually put salaries into hard to get rich account, regard annual bonus as an added gift, and put a winning lottery into pie-in-the-sky account. The specie in the hard to get rich account is expensed precisely and carefully for annual bonus, we lots have relaxed attitude to treat it, for example, we might go to shopping pore 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 dollar bill million dollars would become openhanded and extravagant. This is howmental accounting works.My friend went to a fashion store and took a fancy to a very ravishing dress, alone it costs about $320. She thought it is too expensive and gave up finally. But in her birthday party, her husband 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 separate to four parts, which are daily necessities expenditures, home contribution expenditures and personal outgrowth expenditures, expenditures of excited company and recreational expenditures. According to irreplaceable of mental accounting, $320, as daily necessities expenditures, is too expensive to purchase a dress, all the same, the husband purchase it as a birthday gift which can be hardened 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 purc hase for themselves.According to above example, emotional connection and interpersonal relationship is significantly important 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 wrapped coffee bean in Saint Valentines Day, coupons in Christmas, these special offers is negligible for merchants, but it can attract 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. connector fallacyTversky and Kahneman believe that the representativeness heuristic is a means of assessing the fortune o f an uncertain feature or the value of a quantity by comparing it to a mental pose (Berendsen 2012) connecter fallacy is one of the subject that causes by representativeness heuristic, which states the declare that there are two independent events, the probability of both events will go along 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 sizable man who have heart 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 articulation, the probabilit y of connector events happened cannot higher than the probability of any independent event occurs. However in reality, people sometimes linked probability and quantity together by mistake when making decision, they consider that there is a higher probability of concurrence 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 valid for evaluating subjective probabilities.The conjunction fallacy is attributed to the representativeness heuristic. It states that if the probability that the event is include in a classification is decided by how representative the event is of include in this classification. Consequently the conjunction fallacy proceed when the compounding 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 applicabl e. Hence conjunction fallacy might have no any relationship with the heuristic. Secondly, there is an argument that informant misconception 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 fittingly controlled in the survey.Thirdly informants are likely to use an incorrect rule to gibe rise to conjunction fallacy happen when associating the probability of atomic number 53 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 basis of thecharacteristics of perceptual selectivity, the characteristics of information are more distinct and foreplay 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 exte nt, mental process stays at supposed(a) stage up to now. This report discussed three decision making entrap which are mental accounting, 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.ReferenceBerendsen, 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 literature review of the anchoring effect, The Journal of Socio-Economics, vol.