Anchoring is a cognitive bias where people rely too heavily on the first piece of information they receive when making decisions. This initial piece of information is called the “anchor” and it tends to skew subsequent judgments and estimates. Using a thumb rule or heuristic in anchoring refers to relying on a general rule of thumb as the starting anchor or reference point.
What are some common thumb rules used in anchoring?
Here are some examples of thumb rules people often use as an anchor or starting point when making estimates:
- Estimating home value – Start with the listing price and adjust up or down from there
- Negotiating salaries – Start with what you made at your last job and increase by 10-20%
- Forecasting sales – Take last year’s sales and assume a 5-10% increase for this year
- Setting project timelines – Take the length of previous similar projects and add 10-20% buffer time
- Making investment decisions – Assume an 8-10% annual return as a baseline
These thumb rules provide a convenient starting point or anchor. However, relying too heavily on them can lead to biased estimates since the initial anchor overly influences the final judgment.
Why can thumb rules lead to poor estimates?
There are a few reasons why overly relying on thumb rules can result in poor estimates:
- They may not account for specifics of the current situation
- They simplify complex calculations
- They lag behind changes in the environment
- They propagate outdated assumptions
- They ignore statistical outliers and extremes
For example, when negotiating salary, just increasing your prior salary by 10-20% may not account for your experience level, the company’s budget, or current industry compensation trends. While thumb rules provide a convenient starting point, estimates can be improved by gathering more detailed information relevant to the specific situation.
How can you avoid anchoring too heavily on thumb rules?
Here are some tips to avoid over-reliance on thumb rules when making estimates:
- Calculate from first principles when possible – don’t just rely on what was done previously
- Gather additional data points beyond the initial anchor
- Account for situational factors and changes from past precedent
- Consider extreme scenarios and worst/best case possibilities
- Get multiple independent opinions to avoid fixating on one anchor
- Experiment with different starting anchors
- Set up processes to review and update thumb rules over time
When are thumb rules still appropriate to use?
While blind adherence to thumb rules is problematic, they can still serve as useful starting points when:
- You need a fast, approximate estimate
- You have limited data or resources to calculate from scratch
- You want a sanity check on more complex models
- You need a simple baseline for comparisons
- The thumb rule is frequently verified and updated
The key is being aware of the thumb rule’s limitations and augmenting it with additional analysis when possible. Also, thumb rules may be more appropriate for quick back-of-the-envelope estimates versus detailed forecasts or analyses.
Examples of when thumb rules led to poor estimates
Some examples of when overly relying on rules of thumb led to inaccurate estimates include:
- Many people estimated home values would keep rising steadily forever during the housing bubble based on past trends, without accounting for the risk of a crash.
- Blockbuster relied too much on “last year plus 10%” for its sales forecasts without seeing the disruptive threat from streaming services like Netflix.
- Initial COVID-19 death projections relied too heavily on mortality rates for flu rather than examining COVID specifically.
- Many investors in Bernie Madoff’s Ponzi scheme anchored on 10-12% annual returns based on past performance promises rather than questioning how the strategy could work continuously.
Typical percentage ranges used as starting anchors
Here are some typical percentage ranges used as initial anchors across different situations:
| Estimation scenario | Typical starting anchor |
|---|---|
| Salary negotiations | Current salary + 10-20% |
| Home pricing | Comparable home values +/- 5-10% |
| Investment returns | 8-12% annually |
| Project timelines | Previous similar project + 10-30% buffer |
| Forecasting demand | Prior year demand + 5-15% |
The exact percentage range varies by context. The key is to recognize these anchors are just starting points and additional analysis is needed to refine the estimates.
How cognitive biases like anchoring affect decision making
Anchoring is just one of many cognitive biases that can subtly influence human judgment and decision making. Common biases include:
- Confirmation bias – Seeking and interpreting evidence that confirms existing beliefs
- Loss aversion – Weighing potential losses much more heavily than potential gains
- Availability heuristic – Judging probability based on how readily examples come to mind
- Overconfidence effect – Overestimating one’s ability to predict outcomes and make accurate judgments
These mental shortcuts allow us to make decisions quickly, but often lead to systematic errors and suboptimal choices. Being aware of anchoring, confirmation bias, loss aversion and other effects can help counteract their influence on high-stakes decisions.
Strategies for mitigating cognitive biases
Some strategies to reduce the influence of biases like anchoring include:
- Seeking disconfirming evidence and other viewpoints
- Using statistical models and decision aids where possible
- Consulting multiple experts to avoid biased individual judgments
- Slowing down the decision process to allow more deliberation
- Role playing counterarguments to your own views
However, cognitive biases will always influence human thinking to some degree. The goal is being aware of their effects and intentionally adding more objectivity into important judgment calls.
Conclusion
Thumb rules and heuristics provide useful starting anchors but should not be blindly relied upon. Seeking additional data, accounting for situation-specific factors, and updating rules over time allows more accurate estimates. While cognitive biases like anchoring are hard to avoid completely, being aware of their influence can lead to better, more informed decisions.