Can Anchoring Bias Affect Pricing Decisions?
The term “Anchoring Bias” refers to a phenomenon that behavioral economists have long studied. We tend to place too much attention on the first piece of information we see. This is due to a powerful, yet subtle cognitive bias known as anchoring bias. It’s possible that information isn’t even relevant to the subject at hand. Self-storage operators may also be subject to anchoring bias. This anchoring bias can affect pricing decisions.
When we are valuing something, we do so from the perspective of our anchor rather than by looking at a situation objectively. This bias may cloud our judgment. It may cause us to place a value that is either too high or too low.
Pioneering behavioral economists Amos Tversky and Daniel Kahneman ran a fascinating experiment: College students were asked to estimate the total percentage of African countries in the United Nations. But first, the students were asked to spin a wheel with random numbers. Unbeknownst to them, the students were actually spinning a wheel that was designed to stop only on the numbers 10 and 65.
Amazingly, the wheel’s number had a remarkable impact on the students estimates.
On average, those who spun a 10 on the wheel thought that 25% of the African countries were members of the UN. Incredibly, those who spun a 65 thought that 45% were. Kahneman and Tversky coined this behavior “anchoring and adjustment.”
In fact, Kahneman cited anchoring as “one of the most reliable and robust results of experimental psychology.”
Anchoring and the Self-Storage Operator
Self-storage operators also run the risk of succumbing to anchoring bias. A store operator may place too much emphasis on a singular market condition, and thereby use it as an anchor. For instance, a store manager might be anchoring his or her rates to that of a competitor. Never mind the fact that the competitor’s location is more difficult to reach,
In our experience, a lot of operators use the “fast follower” price tactic on their competitor. Although competitor pricing is one consideration, it is not the only one. Even more deceptively, the operator may not even be aware that he or she is benchmarking prices to the competitor.
This is not to argue that all “fast follower” tactics should be avoided; rather, they should be one of several employed as part of a comprehensive self-storage revenue management strategy. This strategy should consider occupancy, seasonality, and other factors in addition to competition. Only by taking a more comprehensive approach can profitability be optimized. Otherwise, anchoring bias may continue to affect pricing decisions, and therefore, profitability.