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Requirement
You will write a short paper on a topic of your choice( The topic is indicated in the title). The assignment is to apply any of the concepts you have learned in class and apply it to a real world experience/observation. The paper will be scored based on the quality of analysis of your observation (e.g. correctly applied scientific terminology to the observation; correct explanation of the phenomenon in terms of a theory discussed in class).
Solution
Introduction
Two famous cognitive psychologists Amos Tversky and Daniel Kahneman in 1974 identified the term “anchoring heuristic.” A heuristic is usually defined as a mental shortcut used by the brain for simplifying all the complex situations and problems so as to make quick judgments and decisions. It is also termed as cognitive bias. Whereas the anchoring heuristic can be defined as a rule of thumb describes the human tendency for accepting and relying too much on the very first piece of information offered during the process of decision-making. This first piece of information acts as an anchor, and once this anchor is set, every decision is made on the basis of the first piece of information regardless of the legitimacy of the anchor.
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Discussion
Kahneman and Tversky researched various groundbreaking studies especially in the fields of science and also on how humans can manage uncertainty and risks. These two were very keen on how people can form judgments in cases with high uncertainty and risks on various facts. They stated as the rule in a situation when the humans are uncertain regarding a correct answer they, as a starting point, can opt for guessing by using the most recent numerical that he/her has heard. Various researches have provided that when people are informed regarding the illegitimacy of the anchor, even then it is found to be unbelievably challenging for avoiding the factoring these anchors into the main decisions.
Various studies and real life situations have been demonstrating the nature of anchoring heuristic, and people are fully aware of the various dynamics of their functions. In the workplace also, the dynamics of anchoring heuristics can be seen to perform various functions. Some of them include:
Planning of the project
The most common practice performed by the project planners is that they create an initial estimation of the stipulated time and cost. This first cut is usually arrived by taking the sum of estimated of every phase or task involved in the project. Therefore, these estimates can be represented as the best case or a typical timeframe for completing the individual task or phase. And then the planner eventually adds the fudge factor or padding for accounting for the unexpected situations while performing the tasks. The initial estimate still acts as the anchor, and the fudge factor is a representative of the insufficient adjustments towards the anchor. This problem can frequently be in the workplace while planning a project. This problem is known as planning fallacy. This problem is usually counteracted by utilization of the historical information while making all the estimations. The planner instead of guessing about the stipulated time and cost for completion of the project should have used actual historical data from the projects done in past. Therefore, the concept of anchoring heuristic occurred when the planner adjusted the stipulated time and cost closer to the numerical value that he/she saw or heard. This tendency of all the project planners for anchoring on the estimated value and making insufficient changes and adjustments for the future aspects. While handling the management of the project leads to an estimation of the uncertainties and risks.
Budgeting
The practice of budgeting involves the budget of the previous period and then adjusting takes place for reflecting the objectives as well as a requirement of the current cycle. Therefore, the budget gets anchored to the numbers and figures of the previous cycle along with adjustments which are certainly not reflective towards the current realities. The only method for counteracting this problem of anchoring in the process of budgeting is the utilization of the zero-based approach. It means that the project must be built from its very own ground rather than the figures and numbers of the last cycle, and no references must be taken from previous budgets.
Negotiations
While negotiating regarding a contract either over the pricing or any term of the deal, the initial figures are first aired, and they serve as the stake in the ground. Then the negotiation is done keeping in mind that the negotiations are anchored towards the stake, generally with the adjustments that are not seen to be reflected in the market realities. This is followed by the fact that the people while taking quantitative estimates, rely heavily on the previous value of the concerned item or deal. This is always seen from the example of the salesman who always selects a high price in the beginning and then offer lesser price and it would be estimated that he has lowered the prices. Anchoring is seen to cause investors for underreacting towards this information.
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Tversky, A. and Kahneman, D. (1974). Judgment under Uncertainty: Heuristics and Biases. Science, 185(4157), pp.1124-1131.
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Epley, N., & Gilovich, T. (2006). The Anchoring-and-Adjustment Heuristic: Why the Adjustments Are Insufficient Psychological Science, 17 (4), 311-318 DOI: 10.1111/j.1467-9280.2006.01704.x
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Janiszewski C, & Uy D (2008). The precision of the anchor influences the amount of adjustment. Psychological Science, 19 (2), 121-7 PMID: 18271859
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