FIELD EXPERIMENTS ON THE ANCHORING OF ECONOMIC VALUATIONS

I. INTRODUCTION Take the last three digits of your social security number (SSN). Turn those numbers into a dollar value (i.e., if your numbers are 462 then they provide a value of $462). Consider whether you would be willing to pay that dollar amount for a first edition of J.R.R. Tolkien's The Hobbit. Now, how much would you actually pay for a first edition original copy? A stylized result from laboratory experiments in economics and psychology is that the answer to the latter valuation question can be strongly influenced by the dollar amount computed at the start. (1) Critics of neoclassical theory have argued that the influence of uninformative anchors--such as the transformed SSN--refutes the notion that decision makers' preferences are predefined, consistent, and stable; instead they are constructed during the process of choice (Bettman, Luce, and Payne 1998; Hoeffler and Ariely 1999; Slovic 1995). A natural conclusion one might draw from studies of anchoring is that decisions may be influenced by irrelevant circumstances and optimization principles do not apply. The laboratory evidence consonant with anchoring effects is considerable. Tversky and Kahneman (1974) make a seminal contribution, implementing a protocol similar to the one described above to examine general knowledge questions. (2) Furnham and Boo (2011) provide a recent review of the literature and identify more than 25 studies that report significant anchoring effects. Substantive areas investigated include general knowledge questions (Epley and Gilovich 2006; Tversky and Kahneman 1974), probability estimates (Wright and Anderson 1989), legal judgments (Englich and Mussweiler 2001), forecasting (Switzer and Sniezek 1991), and valuation and purchasing decisions (Ariely, Loewenstein, and Prelec 2003). Taken together, the results suggest strong effects from anchoring protocols, even in areas where subjects have significant experience. Yet the importance of anchoring for economic outcomes remains an open question. One reason is that research goals and methods differ across the disciplines of psychology and economics (Croson 2005; Hertwig and Ortmann 2001; Plott 1996). (3) Fumham and Boo (2011) note that drawing generalizable conclusions from the existing anchoring studies is difficult as many involve undergraduate students engaged with topics they are unlikely to encounter in field settings. Their observation is consistent with the criticism of the ecological validity of many studies made by Gerd Gigerenzer and colleauges (Gigerenzer et al. 2008) discussed in our footnote 2. While the results of these studies may help distinguish among competing causal claims about the anchoring process, they are less relevant for understanding the potential for anchors to affect market equilibria. Further, many of the studies lack meaningful incentives and we believe that economists are justifiably circumspect about results that may merely reflect mistakes made by unmotivated subjects. Consistent with this view is the idea that, with appropriate incentives and feedback, anchoring effects should diminish and behavior more closely match predictions from neoclassical models. (4) Recent attempts to examine the relevance of anchoring for economic outcomes closely follow Ariely, Loewenstein, and Prelec (2003, ALP hereafter) who find statistically and economically significant effects of anchors on willingness-to-pay (WTP) for common consumer goods and on willingness-to-accept (WTA) for unpleasant sounds and tastes. Bergman et al. (2010) and Fudenberg, Levine, and Maniadis (2012, FLM hereafter) replicate the consumer goods portion of the ALP study with mixed results. Bergman et al. (2010) find significant anchoring results consistent with the earlier work, although the magnitude of the effect is smaller. Implementing an auxiliary protocol, they find also that anchoring effects diminish with cognitive ability. FLM (2012) attempt to anchor both WTP and WTA and find no evidence of anchoring in the WTP treatment. …