When you throw the anchor overboard—assuming you kept its chain or cable attached to the boat somehow—you’re stuck. Sure, the boat can drift this way or that, but this limited range of movement will not exceed the length of the chain attaching the boat to the anchor.
Not a sailor? Don’t look good in white bellbottoms?
You still need to pay attention to anchors. They set the range in all kinds of financial transactions and can sink you. (Yes, I crafted this whole post to use that lousy pun.)
Take buying a house. There’s always an asking price, right? That’s the anchor. The house will sell for a percentage above or below that initial salvo. Those percentage movements are limited. Nobody bids 50% under the asking price and gets the selling broker/owner to consider them a serious buyer.
The asking price, i.e. anchor, sets a range. And except in extremely unusual circumstances--3,000 people bidding on Bruce Springsteen’s former beach house; a bank foreclosure auction—that range is going to be, say, +/- 10% of the asking price. The moment you make a bid, you’ve agreed that the anchor is a reasonable starting point and you’re willing to negotiate within this unspoken range.
Psychologists and behavioral economists have studied this phenomenon and you can read all about the proof behind the pudding in marvelous, poorly written books like Daniel Kahneman’s “Thinking Fast and Slow”. (He won a Nobel prize, which is kind of its own anchor in terms of street cred.)
The asking price/anchor is not the asking price/anchor because it’s necessarily an accurate portrayal of market conditions, or because god has blessed it. An asking price/anchor is the asking price/anchor because the seller said so.
A way to avoid a badly set anchor? Go buy somebody else’s house.
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