Humans do not make decisions in a vacuum. We are heavily influenced by our environments; sometimes subconsciously.
A well-known psychological tendency that influences decisions is known as anchoring. The 'anchor' upon which a decision rests can heavily influence its outcome. One well-known example in behavioral economics comes from a study in which participants were asked to write down the last two digits of their social security number. Next they were asked how much they would be willing to pay for an item, such as a bottle of wine. Individuals whose digits were low were willing to pay significantly less on average for the bottle of wine than people whose two digits were high. This is in spite of the fact that those digits were completely random, and everyone was bidding on identical bottles of wine. Are you surprised to learn that the price you are willing to pay for an item may be influenced by completely arbitrary information? Well prepare yourself; the plot thickens.
This week a surprising new finding was published that extends what we know about anchoring. Researchers put study participants on a Wii balance board, which measures centre of gravity and captures whether an individual is leaning in one particular direction or another. While the participants were on the board, the researchers asked them to stand up straight; nonetheless, most happened to lean slightly in one direction or the other. Next, researchers asked participants to estimate quantities, such as the height of the Eiffel Tower or the number of hit records Michael Jackson had in the Netherlands. They found that people who leaned to the left tended to give lower estimates than people who leaned to the right. The researchers attribute this to the following subconscious anchor: when people count they typically think of small numbers to the left and large numbers to the right.
Why does this matter? The effects may be subtle, but your body's posture may actually affect the amount you are willing to pay for a consumer good, or even a financial asset!
The finding also raises some interesting questions. Is the tendency to think of small numbers to the left and large numbers to the right a consequence of the left-to-write reading standard in most languages? If so, would people whose mother tongue is a language read right-to-left, such as Arabic or Hebrew, exhibit the opposite tendency? Or is the tendency to associate small numbers with the left and large numbers with the right more biologically hard-wired, and perhaps tied to left- or right-handedness? Does the tendency extend to framing the left or right in other contexts, such as political affiliation?
The degree to which such human characteristics such as anchoring influence human decisions is the topic of a new book which has premiered at number three on the New York Times Nonfiction Best Seller List: Thinking Fast and Slow, written by Daniel Kahneman. Professor Kahneman is the first psychologist to have won the Nobel Prize in Economics. Economists like myself, and increasingly members of the general public, are interested in such phenomena precisely because they have the potential to influence individual economic decisions and ultimately what happens in financial markets. And financial markets, are the anchor upon which our financial futures rest.
Follow Lisa Kramer on Twitter: www.twitter.com/ProfLisaK