How Anchoring, Ordering, Framing, and Loss Aversion Affect Decision Making

By Colleen Roller

Published: March 7, 2011

“Because people determine value by comparing things, the value of a particular item can seem very different in various situations, depending on what they’re comparing it to.”

In my previous couple of columns, I discussed a very important aspect of decision-making: relativity—the way people determine value by comparing and contrasting one thing to another. Because people determine value by comparing things, the value of a particular item can seem very different in various situations, depending on what they’re comparing it to.

Let’s consider the following scenario:

Deb is buying a camera online and needs a case to go with it. In which circumstance is she likely to buy a more expensive case?

  1. When a Web site recommends a case to her as she’s purchasing the camera
  2. When she realizes later that she needs a case
  3. Neither of the above

The correct answer is 1. If Deb is buying an expensive camera, the cost of the case seems minimal in comparison to the cost of the camera. A $30 case looks a lot cheaper next to a $600 camera than when a shopper compares it to other comparable camera cases.

In this column, I’ll describe how anchoring, ordering, framing, and loss aversion affect people’s decisions.

Anchoring and Ordering

“An anchor is a thing that serves as a reference point for our comparisons.”

One key aspect of the comparison process is something called anchoring. An anchor is a thing that serves as a reference point for our comparisons. In the previous example, the anchor is the $600 price of the camera. Because the price of the camera is the reference point, the $30 case seems like a good deal. If the $30 case were the reference point, the $600 camera would seem very expensive.

Another key aspect of the comparison process that influences people’s perception of value is ordering—how the items in a choice set are ordered. Together, these two key aspects of the comparison process—anchoring and ordering—play a significant role in how people determine value. Let’s look at another scenario:

You’re in charge of designing the wine list for a friend’s restaurant, and he wants his patrons to purchase primarily the more expensive wines. To achieve his goal, how would you arrange the wine listings?

  1. Alphabetically
  2. By price, least expensive first
  3. By price, most expensive first
  4. Randomly
“The ordering of items affects what becomes the anchor, or reference point, in people’s minds as they compare items.”

The correct answer is 3. Why? Because when people read from the top of the page down, they encounter the most expensive wines first, so these set the anchor against which people compare all other wines. All wines in the list beyond the most expensive ones would appear to be a much better value.

If you instead ordered the wine list so the least expensive wines appeared first, those would become the anchor against which people would compare all other wines, and the wine list as a whole would seem more expensive. The ordering of items affects what becomes the anchor, or reference point, in people’s minds as they compare items.

Consultants who advise restaurants on how to design their menus have found that putting just a single high-priced item on the menu can increase the restaurant’s overall revenue. Why? Because, while people don’t typically order the most expensive option on the menu, they often do order the second most expensive item, which seems like a good deal in comparison to the highest-priced option. [1]

Implications for Design

“The design implications of anchoring and ordering are huge.”

As you can probably see, the design implications of anchoring and ordering are huge. Let’s look at an example of how you can apply these concepts:

If, as the administrator of a local nonprofit, you’d like to increase the size of incoming donation amounts, how could you design the donation form to help achieve your objective? Let’s consider two possible designs for the donation form, shown in Figures 1 and 2.

Figure 1—Larger donation amounts, from high to low

Larger donation amounts, from high to low

Figure 2—Smaller donation amounts, from low to high

Smaller donation amounts, from low to high

Which ordering do you think would result in larger donations—and why?

“Your anchor points must be realistic for your target audience.”

There are two main differences between these examples: the ordering of the amounts and the size of the amounts. Each has an impact on the decision outcome. As I mentioned earlier, ordering the numbers so the largest amount appears first makes each amount thereafter seem like less money. It is, therefore, to your benefit to start with the largest amount.

But each example also uses different amounts. Why would this make a difference? Many people don’t know the right amount to donate. By listing some potential donation amounts, you set an anchor, or reference point.

When the amounts are larger, you’ll likely get bigger donations, right? Probably. But the outcome also depends on your audience. For instance, you may get a very different response if your audience consists of wealthy people versus college students. Your anchor points must be realistic for your target audience. Therefore, to use the concepts of anchoring and ordering effectively, you need to know your audience.

Framing Decisions

“The language that we use to frame a decision process also influences people’s perceptions greatly.”

We’ve seen how anchoring and ordering influence the perception of value. The language that we use to frame a decision process also influences people’s perceptions greatly. To illustrate, let’s consider an example:

What if you encountered the following options?

  1. A pound of meat that is 90% lean
  2. A pound of meat that is 10% fat

Which would you prefer?

Even though these are just two different ways of saying exactly the same thing, you’d probably prefer option 1. Why? Because lean meat is better than fatty meat. The description, or frame, in which we present a decision highlights different attributes—lean versus fat—to which we draw the decision maker’s attention.

Now, this may seem like a simple example, but the concept of framing plays out in a myriad of ways in our daily lives, influencing our decisions in ways that we are largely unaware of. For example:

If you were a physician advising a patient on a form of treatment, you could frame the decision about whether to employ that treatment in either of the following ways:

  • This treatment has a 90% chance of saving your life.
  • This treatment has a 10% chance of failure, resulting in death.

People would respond differently to these two ways of framing the decision, even though both statements are essentially equivalent. Why is this so? Each of the two options presents a different perspective on the decision outcome. As a decision maker considers the outcome of a decision, we can draw his attention to either a positive outcome or a negative outcome—a gain or a loss.

Loss Aversion

“People experience losses very differently from gains.”

Studies have shown that people experience losses very differently from gains. For example, if you make money in the stock market, you’ll experience a certain amount of pleasure. But if you lose money, you’ll experience a certain amount of displeasure, or pain. Research shows that people experience about twice as much pain with a loss as they experience pleasure with a gain. Thus, people are highly loss averse. And loss aversion figures prominently into how people behave when making decisions.

When we frame a decision in a particular way, people become sensitive to the gains or losses that would be associated with the decision outcome. For example:

If a salesman were telling someone that they need to replace or upgrade the insulation in their home, which of these statements would be most effective in getting that person to take action?

  • You’ll save money by replacing the insulation in your home.
  • You’re losing money by not replacing the insulation in your home.

The second statement is much more compelling, because it draws attention to the monetary losses a person is incurring because of an existing situation. In this case, losing money is much more compelling than saving money.

The Power of the Frame

“Framing is powerful because it strongly influences people’s mindset as they consider decision outcomes.”

Framing is powerful because it strongly influences people’s mindset as they consider decision outcomes. What makes framing so powerful is that people often don’t question the frame. And they rarely reframe a decision in a different way. Because people are sensitive to the work of decision making, they often simply accept the frame as it is presented.

Another reason the frame is highly influential is because it determines people’s focus—what they pay attention to when deciding. To illustrate, let’s consider another scenario:

A judge is deciding a divorce case in which he needs to determine which parent should have sole custody of their only child. Basing his decision on the following information, to which parent would he award sole custody?

Parent A Parent B

Average income
Average health
Average working hours
Reasonable rapport with the child
Relatively stable social life

Above-average income
Very close relationship with the child
Extremely active social life
Lots of work-related travel
Minor health problems

What about if he needed to determine which parent should be denied sole custody?

In an actual study, the results differed according to how the question was asked—for example, whether the researchers asked someone to award or deny sole custody. When they asked people to award sole custody, 64% said it should be parent B. But when they asked people to deny sole custody, 55% said it should be parent B. Thus, depending on how people were asked the question, they determined that parent B should be both granted and denied sole custody. [2]

What drives such a result? The framing of the question—how it was asked. When the question involved choosing who should be awarded sole custody, people focused on the positive traits of each parent. But when the question involved choosing who should be denied sole custody, people focused on the negative traits of each parent.

Implications for Design

“When considering decision architecture, it’s useful to pose questions in different ways, then play out likely decisions for each of the options.”

From a design perspective, framing influences decisions in three ways:

  • how the question is asked
  • how the options are described—for example, their attributes
  • the number of options available

The designer has control over all three of these factors. When considering decision architecture, it’s useful to pose questions in different ways, then play out likely decisions for each of the options. In each case, the framing of a question draws user’s attention to different attributes, as we’ve seen in the custody example I described. As a designer, you choose which attributes to use in describing each option. Ideally, these should be the attributes users care about most—and are those upon which they should base their decision.

Just as framing plays a role in how we word a question and choose the attributes to use in describing options, it also plays a role in determining the number of available options. In my last column, I advised that one way to simplify a decision is to structure it as a binary choice. Research has shown that, psychologically, people think about binary choices differently from choices that offer multiple options, because decision makers focus their attention differently in each situation.

If we offer people a single option to consider—for example, should they increase their level of retirement savings to 5%?—they’re more likely to perceive the decision as an opportunity and focus on the one option they’re given. But if we offer people multiple options—for example, a choice between five potential savings levels—they spread their attention across all of the options as they consider each one and compare it to the others.

Because people are sensitive to the work involved in decision making, they typically consider only the options we explicitly present. Research shows that framing actually causes people’s preferences to change when we present decisions as binary choices versus choices that present multiple options.

Framing and Anchoring

“The frame in which we present a decision has profound implications for how people decide. Framing is particularly powerful when it also involves anchoring.”

The frame in which we present a decision has profound implications for how people decide. Framing is particularly powerful when it also involves anchoring. For example:

If you owned a gas station and wanted to charge a different price for gas depending on whether customers pay with cash versus a credit card, you could present this as a discount for cash or a surcharge for credit. If you call the cash price a discount, the credit-card price becomes the default, or anchor, against which customers compare the cash price. Conversely, if you call the credit-card price a surcharge, the cash price becomes the anchor against which customers compare the credit-card price.

Which frame would be more palatable to your customers? How would the frame influence their perception and purchasing behavior? How do you typically see such price differences framed? Why?

Because people are loss averse, it is more palatable for them to think of the credit-card price as the normal price and the cash price as the discount price. If they pay in cash, they experience this as a gain, because they’ve saved money. However, if they perceive the cash price as the normal price, they experience paying the surcharge for using a credit card as a loss, because of the additional cost.

Final Thoughts

“Each of these concepts plays a significant role in how people perceive the nature of a decision and the available options, as well as in driving the decision outcome itself.”

In this column, I’ve covered a lot of territory. I’ve discussed some very important concepts in decision architecture: anchoring, ordering, framing, and loss aversion. Each of these concepts plays a significant role in how people perceive the nature of a decision and the available options, as well as in driving the decision outcome itself.

When we understand how these concepts affect perception and decision making, we can use them productively in architecting better decision-making experiences for people and be more effective in helping organizations achieve their business objectives.

References

[1] Kantor, Jodi. “Entrees Reach $40.” New York Times, October 21, 2006. Retrieved February 17, 2011.

[2] Shafir, Eldar, Itamar Simonson, and Amos Tversky. “Reason-Based Choice.” Cognition, Vol. 49, 1993. Retrieved February 17, 2011.

6 Comments

Best decision-making article I’ve read all year! I am optimizing an antivirus company’s Web site right now, and this got my whiteboard full with ideas. Thank you!

Hi Colleen,

I enjoyed this article and your wonderful explanation of key principles that affect how users make decisions. Nice examples.

I see content as playing an important role in applying many of these principles. What is your view of content in these principles or in decision-making architecture?

(Fantastic name, by the way.)

Colleen

Great read. We have based our entire Web site on the premise of the example you provide regarding a discount for cash!

It’s great that so many are finding this column helpful!

Colleen asked about my thoughts on the role of content in applying the principles I discuss in this column. Colleen, I agree with you that content is key, especially considering the power of both framing and loss aversion. The way we state things—ithe way we pose questions and present information to people—iis key to determining how their attention will be focused and the mental process they will use to make a judgment or decision.

Great article. I have had similar thoughts of using these psychological principals in the area of instructional design and e-learning. Whether it’s the principle of expectations or priming these psychological principles can improve the experience and the behavior outcome, I believe this works just as well for instructional design as it does for the field of user experience. After all, the delivery of learning to people through a system doesn’t work effectively if people don’t make the decision to use the knowledge and apply it within their job.

-Mike

Your great article reminded me of an experience a few years ago. During my MBA, we were asked to attempt improving a Heart Torch Drive donation’s campaign. The picture of a family was presented. One member had a slash across showing the possibility of eventual death. The message was to donate in order to avoid death. I changed it completely into a picture of a super happy family. No deaths because of your generous contributions helping to the extent that deaths can be prevented and avoided. I got the highest grade of the class. The Heart Torch Drive person told me that they will try to utilize this positive approach.

Join the Discussion

Asterisks (*) indicate required information.