What Is Anchoring and Adjustment?

Anchoring and adjustment is a phenomenon wherein an individual bases their initial ideas and responses on one point of information and makes changes driven by that starting point. The anchoring and adjustment heuristic describes cases in which a person uses a specific target number or value as a starting point, known as an anchor, and subsequently adjusts that information until an acceptable value is reached over time. Often, those adjustments are inadequate and remain too close to the original anchor, which is a problem when the anchor is very different from the true answer.

Understanding Anchoring and Adjustment

Anchoring is a cognitive bias described by behavioral finance in which individuals fixate on a target number or value—usually, the first one they get, such as an expected price or economic forecast. Unlike the conservatism bias, which has similar effects but is based on how investors relate new information to old information, anchoring occurs when an individual makes new decisions based on the old, anchor number. Giving new information thorough consideration to determine its impact on the original forecast or opinion might help mitigate the effects of anchoring and adjustment, but the characteristics of the decision-maker are as important as conscious consideration.

The problem with anchoring and adjustment is that if the value of the initial anchor is not the true value, then all subsequent adjustments will be systematically biased toward the anchor and away from the true value. However, if the anchor is close to the true value then there is essentially no problem.

One of the issues with adjustments is that they may be influenced by irrelevant information that the individual may be thinking about and drawing unfounded connections to the actual target value. For instance, suppose an individual is shown a random number, then asked an unrelated question that seeks an answer in the form of an estimated value or requires a mathematical equation to be performed quickly. Even though the random number they were shown has nothing to do with the answer sought, it might be taken as a visual cue and become an anchor for their responses. Anchor values can be self-generated, be the output of a pricing model or forecasting tool, or be suggested by an outside individual.

Studies have shown that some factors can influence anchoring, but it is difficult to avoid, even when people are made aware of it and deliberately try to avoid it. In experimental studies, telling people about anchoring, cautioning them that it can bias their judgment, and even offering them monetary incentives to avoid anchoring can reduce, but not eliminate, the effect of anchoring.

Higher levels of experience and skill in a specific field can help reduce the impact of anchoring in that subject area, and higher general cognitive ability may reduce anchoring effects in general. Personality and emotion can also play a role. A depressed mood increases anchoring, as do the personality traits of agreeableness, conscientiousness, introversion, and openness.

Anchoring and Adjustment in Business and Finance

In sales, price, and wage negotiations, anchoring and adjustment can be a powerful tool. Studies have shown that setting an anchor at the outset of a negotiation can have more effect on the final outcome than the intervening negotiation process. Setting a deliberate starting point can affect the range of all subsequent counteroffers.

For example, a used car salesman (or any salesman) can offer a very high price to start negotiations that are arguably well above the fair value. Because the high price is an anchor, the final price will tend to be higher than if the car salesman had offered a fair or low price to start. A similar technique may be applied in hiring negotiations when a hiring manager or prospective hire proposes an initial salary. Either party may then push the discussion to that starting point, hoping to reach an agreeable amount that was derived from the anchor.

In finance, the output of a pricing model or from an economic forecasting tool may become the anchor for an analyst. One possible way to counteract this is to look at multiple, diverse models or strands of evidence. Social psychology researcher Phillip Tetlock has found that forecasters who make predictions based on many different ideas or perspectives (“foxes”) tend to make better forecasts than those who focus on only a single model or a few big ideas (“hedgehogs”). Considering several different models and a range of different forecasts may make an analyst’s work less vulnerable to anchoring effects.

What is an 8(a) Firm?

An 8(a) firm is a small business that is owned and operated by socially and economically disadvantaged citizens and that has been accepted into the 8(a) Business Development Program. This program is administered by the Small Business Administration (SBA), the United States agency charged with supporting the growth and development of small businesses. The 8(a) program is designed to help disadvantaged entrepreneurs get government contracts and access the economic mainstream in America.

How 8(a) Firm Status Works

The 8(a) status is specially granted by the SBA to any small business that qualifies, making it eligible for financial assistance, training, mentoring, and other forms of assistance. In order to qualify for this special status, businesses must be owned and operated by individuals who are considered socially and economically disadvantaged. These individuals may have been subject to racial or ethnic prejudice or cultural bias.

The 8(a) status is outlined specifically in Section 8(a) of the Small Business Act, and is designed to help small, disadvantaged businesses compete in the general market. The federal government has a stated goal of awarding at least 5% of federal contracting dollars every year to these businesses.

The Purpose of the 8(a) Business Development Program

One of the main reasons behind the creation of the 8(a) status was to increase business involvement by a broader portion of society. The SBA identifies several groups that are eligible for 8(a) status, including Black Americans, Hispanic Americans, Native Americans, Asian Pacific Americans, and Subcontinent Asian Americans. Someone who is not a member of one of these groups may still get into the program if they can show significant evidence of having been socially disadvantaged—for instance, due to race, ethnic origin, gender, and physical handicap, among other causes.

Through the 8(a) Business Development Program, owners can compete for special contracts, such as sole-source government contracts for which there are no competitive bids, that help level the playing field for their small businesses. These small businesses can use the program to form joint ventures with already-established businesses to form mentor-protégé relationships, as well as for management and technical assistance. Businesses must meet certain requirements to be eligible to be a protégé.

Qualifications for 8(a) Firm Status

In order to qualify to become an 8(a) firm under SBA guidelines, a business must meet the following criteria (effective July 15, 2020):

• It must be a small business.
• It must not have participated in the program before.
• At least 51% of the business must be owned and operated by U.S. citizens who are considered economically and socially disadvantaged.
• The owner’s personal net worth must be no higher than $750,000
• The owner’s average adjusted gross income (AGI) must be $350,000 or less.
• The owner must have no more than $6 million in assets.
• The owner must be of good character.
• It must show the potential for success and be able to perform successfully on contracts.

Title 13 Part 124 of the Code of Federal Regulations (CFR) spells out who qualifies for the 8(a) program as well as what counts as being economically and socially disadvantaged.

The first step: getting certified

Owners interested in taking part in the program are encouraged to do an on-line training and self-evaluation course through the 8(a) Business Development Suitability Tool. The course helps entrepreneurs determine whether or not their company meets the qualifications for the 8(a) program and if it does not, directs them to an appropriate SBA resource.

Before a firm can participate in the 8(a) program, it must first be certified at certify.SBA.gov. And small businesses that want to use the certification website must have a profile at SAM.gov, which is where companies register to do business with the U.S. government. (Contact your local SBA office if you have questions about applying.) Once you have applied, the administration will send a notification letter explaining whether the business was accepted into the 8(a) program. The certification lasts for nine years—the first four years are considered to be developmental, while the remaining five are deemed to be a transition phase. 

Small businesses that gain 8(a) status are subject to annual reviews in order to keep the designation and their good standing in the program. During these reviews, the business owner has to draw up business plans and undergo systematic evaluations. Entrepreneurs who have secured 8(a) firm status say that the application process can be lengthy and rigorous, having prior experience with government contracts can be helpful, and working hard to take advantage of the program’s benefits can make the experience very rewarding.