A big reason why it’s difficult for us to make rational spending decisions, says Guy Birken, is because money has no inherent value.
“It actually only has value because we have all decided that it has value,” she says, “and so the reason why we are subject to anchoring is because we are dealing with this kind of theoretical item that doesn’t really exist.”
But she says there are ways to determine how valuable an item or service truly is to you.
One way, she says, is to calculate the number of hours you will have to work to afford it.
Let’s say you make about $35 an hour.
You’ve decided you want to hire a personal trainer. One charges $70 an hour — the equivalent of about two hours of work. Another trainer charges $40 an hour — slightly more than one hour of work.
Based on your lifestyle and expenses, you may conclude that a session is only worth about an hour of work, so you set your anchor at $40 an hour.
Another way to determine the value of something, Guy Birken says, is to compare its cost to the cost of something you love.
Let’s say you love craft coffee, which costs $2.50 a cup at your local coffee shop. You are also trying to figure out whether you want to spend $50 on a dress. The dress will cost you the equivalent of 20 cups of coffee.
Using coffee as an anchor, you can easily determine how valuable the dress is to you.
“That’s where anchoring can help you,” Guy Birken says, “is if you create your own mental anchor that means more to you than what money might mean.”
Guy Birken and her husband, who live in Milwaukee, Wisconsin, have purchased three homes over the course of their marriage. Each time, the realtor tried to get them to look at houses outside their price range, she says, but they refused.
She explains why: If a realtor is encouraging you to buy a house that is $30,000 outside your price range, he may easily convince you it’s not much more — after all, the price won’t add much to your monthly payment.
“But it is that much,” Guy Birken says.
“You need to decide for yourself what you can afford and not allow other people to pull your anchor north,” she says.