You can listen to an auctioneer value anchoring at virtually any live auction in the United States any day of the week at over 2,500 live auctions. It works simply like this:
Folks, look at this nice Civil War Sword and I’d like $500 for it … well, somebody give me $100? $50?
Actual or constructive anchoring is paramount, and the “prospect of a deal” is imperative for a successful auction.
The anchor suggests at or near value and then the minimum bid or starting bid below that suggest the possible deal. Once bidders bid, their current equity encourages further bidding.
In our sword example, the $500 announcement suggests the sword possibly worth $500 and then the $100? and/or $50? suggests the potential deal. Once someone bids $50, that bidder now has ownership equity legally and more importantly emotionally.
In theory, if this sword was opened up by asking $600 then the expected final bid price would be higher than if it was opened up by asking $500. As the anchor goes, so does the perception of worth.
But there’s a catch. By anchoring too high, creditability is potentially lost and so is the anchoring effect. A $500 sword combined with “Folks, look at this nice Civil War Sword and I’d like $5,000 for it …” loses the anchoring effect altogether, and all is left is the bidders’ own assessment of value.
As well, by anchoring too low, bidders often wonder if there is some latent issue. A $500 sword combined with “Folks, look at this nice Civil War Sword and I’d like $50 for it …” has the effect of suggesting the sword is only worth $50 — and there must be some problem with it.
Anchoring has little impact when the value of the property is widely known. New $100 bills are seen as worth $100 and largely no matter if the anchor is $100, $200, $300 … the actual known value will take precedence over the anchor value.
Auction houses with pre-auction estimates often benefit from value (price) anchoring. A buyer might rightly wonder in some isolated cases, “Is that a $5,000,000 painting or a $20,000,000 painting?” A pre-auction estimate of $17,000,000 – $25,000,000 might suggest it is far more valuable than $5,000,000.
Retail stores have used value anchoring more recently than auctioneers, suggesting a certain price and then enticing customers with a discount from the anchored price. Many companies over the years have raised their prices for the sole purpose of suggesting more value, leveraging the misconception that price = value.
The J.C. Penney “Fair and square” marketing campaign a few years ago using an auctioneer in part suggested (hoped) consumers would appreciated the lack of value anchoring. We wrote about that here: https://mikebrandlyauctioneer.wordpress.com/2012/05/27/fair-and-square/
In fact, consumers seem to prefer value anchoring.
For those new to value anchoring, know that for auctioneers, value anchoring is as old as our profession itself.
Mike Brandly, Auctioneer, CAI, AARE has been an auctioneer and certified appraiser for over 30 years. His company’s auctions are located at: Mike Brandly, Auctioneer, Keller Williams Auctions and Goodwill Columbus Car Auction. He serves as Adjunct Faculty at Hondros College of Business, Executive Director of The Ohio Auction School and Faculty at the Certified Auctioneers Institute held at Indiana University.