In 2000, Netflix CEO Reed Hastings walked into Blockbuster’s headquarters with an offer: purchase Netflix for $50 million (Randolph, 2019). Blockbuster’s leadership rejected the proposal outright. At the time, Blockbuster had 9,000 stores worldwide and nearly $6 billion in revenue, while Netflix was a small mail-order DVD service. Blockbuster was anchored to its brick-and-mortar dominance, unable to see beyond the metrics that had made it successful. That anchor—physical stores, late fees, and pay-per-rental—blinded the company to the streaming revolution ahead. Ten years later, Blockbuster filed for bankruptcy while Netflix grew into what is now a $200 billion streaming giant (Variety, 2013).
This is anchoring bias in action, and it’s costing businesses millions in missed opportunities and poor decisions.
The Psychology Behind the Anchor
Anchoring bias is one of the most pervasive cognitive traps in business decision-making. First documented by behavioral scientists Amos Tversky and Daniel Kahneman (1974), anchoring describes our tendency to rely too heavily on the first piece of information we encounter—even when that information is arbitrary, outdated, or irrelevant.
The mechanism is simple but powerful: our brains latch onto initial reference points and struggle to adjust away from them, even when presented with contradictory evidence. As Hammond, Keeney, and Raiffa (1998) noted in their seminal Harvard Business Review article, “The way the human brain works can sabotage the choices we make” (p. 47). Anchoring leads us to give disproportionate weight to first impressions, distorting everything from strategic planning to financial negotiations.
For CEOs and founders, this isn’t an academic curiosity—it’s a daily threat to optimal decision-making. Whether you’re setting prices, negotiating deals, or planning next year’s strategy, anchors are quietly steering your choices, often in the wrong direction.
Where Anchors Hide in Your Business
Strategic Anchors: When Past Success Becomes Future Constraint
The most dangerous anchors are often your early wins. That first product-market fit, that initial customer segment, that scrappy go-to-market strategy that got you to $10 million—these successes create powerful mental anchors that can prevent you from seeing new opportunities.
Tversky and Kahneman (1974) explained this through their concept of “adjustment from an anchor”: once we establish a reference point, we make insufficient adjustments when circumstances change. We see this repeatedly in business strategy. Companies anchor on their founding assumptions and fail to re-evaluate them as markets evolve.
Consider the SaaS founder who anchored on small business customers because that’s where early traction came from. Five years later, enterprise clients are knocking on the door, but the company is still optimizing everything for SMBs. The anchor—”we’re an SMB solution”—has become a ceiling on growth.
Blockbuster’s story illustrates this perfectly. Even as Netflix pivoted from DVDs to streaming in 2007, Blockbuster remained anchored to its physical store model. When CEO John Antioco tried to position Blockbuster as a streaming service, internal resistance from those anchored to the existing revenue model—particularly late fees that comprised approximately $800 million in annual revenue—prevented meaningful change (CNBC, 2020). As one industry observer noted, Blockbuster had the resources, customer base, and content relationships to compete, but those very assets became anchors that made adapting increasingly difficult (Antioco, 2011).
The lesson? Yesterday’s perfect strategy might not be tomorrow’s, but anchoring makes it hard to break away.
Financial Anchors: The First Number Problem
Nowhere is anchoring more visible—and costly—than in financial decisions. The first price mentioned in a negotiation often determines the range of the entire deal, regardless of its merit (Hammond et al., 1998).
In one revealing study, researchers asked real estate agents—professionals who should know better—to inspect a house and estimate its value. Despite their expertise, the agents’ estimates were significantly influenced by manipulated list prices, even though they denied factoring those prices into their decisions (Northcraft & Neale, 1987). Even experts fall prey to anchors.
The same pattern appears across business:
Pricing Strategy: When Apple launched the iPad in 2010, Steve Jobs displayed a price of $999 on screen before revealing the actual price of $499 (Apple, 2010). That high anchor made the real price seem like an incredible deal. Conversely, JCPenney learned this lesson the hard way. In 2012, CEO Ron Johnson eliminated sales promotions in favor of “fair and square” everyday low prices, assuming customers would appreciate transparency. Sales plummeted by 25% that year, resulting in a net loss of $985 million (TIME, 2013). Johnson failed to understand that customers were anchored to the “sale price” reference point—without that high anchor, the actual prices seemed less appealing. As one retail expert explained, “Shoppers aren’t purely logical creatures. They’re often drawn to stores not by the promise of fair pricing, but by the lure of hunting for deals” (Harvard Business Review, 2013).
Negotiations: The party who sets the first offer in a deal often tilts the outcome in their favor. When selling equity in your company or negotiating major contracts, if the other side opens with a very low figure, your counter-offers tend to gravitate near that anchor—implicitly validating it even when it’s baseless. Hammond et al. (1998) found that even experienced negotiators struggle with this, as the initial offer creates a reference point that’s difficult to escape.
Budgeting and Forecasting: Corporate planning is rife with potential anchors. A common pitfall is using last year’s budget or last quarter’s results as a hard baseline. If your company grew 50% last year, anchoring bias might lead you to automatically project similar growth—even if market conditions or your product roadmap suggest a different story. This can lock in legacy spending that no one questions, missing inflection points where exponential growth or decline kicks in.
Operational Anchors: Clinging to Outdated Data and Processes
Anchoring bias doesn’t only influence high-level strategy or big-ticket deals; it seeps into everyday operations and management decisions. Operations teams often pride themselves on being data-driven and efficient, yet they can unknowingly latch onto the first data or process that comes their way.
Legacy Metrics: Companies often continue to track and incentivize metrics that made sense in early stages, even when those metrics have lost relevance. A manufacturing operations manager might obsess over a production target set years ago when machinery and demand were different. That target becomes an anchor, driving production scheduling and resource allocation around a number that no longer reflects current reality. If a factory anchored on producing 1,000 units per week because that was the initial goal, managers might keep pushing for 1,000 units even when market demand or product mix has shifted, causing overproduction or stockouts.
Hiring Decisions: The first candidate interviewed often becomes a subconscious benchmark for all others. Research by Northcraft and Neale (1987) demonstrated that even expert judgments—like mechanics estimating the value of a used car—are significantly skewed by anchors. When given a low anchor, mechanics provided much lower valuations; with a high anchor, much higher ones. The same happens in hiring: if the first candidate states a desired salary of $X, hiring managers often anchor around $X in negotiations with later candidates, even when those candidates merit different compensation.
These operational anchors can lead to inefficiencies, waste, and missed opportunities—all hitting the bottom line and customer satisfaction.
Breaking Free: Strategies to Counteract Anchoring
Awareness of anchoring bias is necessary but not sufficient. You need systematic approaches to defuse anchors before they distort decisions.
1. Delay the Anchor
When facing major decisions, deliberately avoid exposing yourself to potential anchors too early. If you’re setting product pricing, develop your value-based pricing model before you look at competitor prices. If you’re in acquisition talks, determine your walk-away number before hearing the first offer.
This approach works because it gives your brain multiple reference points instead of a single dominant anchor. As Hammond et al. (1998) recommended, establishing your own framework first makes external anchors less influential.
2. Seek Multiple Perspectives
Anchoring weakens when you flood your analysis with diverse inputs. Don’t rely on a single forecast or one person’s opinion. Giuliano (2023) notes that bringing in outside viewpoints—especially those who aren’t aware of your initial assumptions—can expose how arbitrary your reference point might be. Fresh eyes, unanchored by the original context, often spot flaws or opportunities you missed.
Consider excluding yourself from initial brainstorming sessions when your own assumptions might anchor the team. Research shows that the first idea in a brainstorming session sets both the direction and the perceived quality bar—others tend to circle that anchor rather than explore alternative paths.
3. Practice Assumption Audits
Quarterly, list the key assumptions underlying your major initiatives. Then systematically challenge them:
● What initial information formed this assumption?
● Has the context changed since we set this baseline?
● What evidence contradicts this anchor?
● If we started fresh today, would we arrive at the same conclusion?
This exercise forces you to treat assumptions as testable hypotheses rather than immutable facts. Tversky and Kahneman’s research showed that explicitly questioning anchors reduces their influence on subsequent judgments. As Haque (2018) observes, the more information you gather from diverse sources, the better your decision will be—diluting the power of any single anchor.
4. Create a Culture of Constructive Challenge
Your team needs permission—even encouragement—to challenge prevailing anchors. Appoint a devil’s advocate in important meetings. Reward people who bring contradictory data. Make “why do we believe that?” a standard question.
Hammond et al. (1998) found that organizations with strong dissent cultures make better decisions precisely because multiple voices prevent any single anchor from dominating. Koller, Lovallo, and Sibony (2018) emphasize this in their research on budget biases, noting that independent perspectives free from the original anchor can dramatically improve financial planning accuracy.
5. Use Decision Checklists
For recurring high-stakes decisions, implement checklists that explicitly probe for anchoring:
● Have I identified what anchor might be influencing this decision?
● Am I giving disproportionate weight to the first number I heard?
● What would I decide if this anchor didn’t exist?
● Have I considered alternatives that differ significantly from the anchor?
These questions interrupt the automatic cognitive processes that make anchoring so insidious.
The Competitive Advantage of Adaptive Thinking
Here’s the paradox: your competitors are probably anchored too. That CEO stuck on outdated growth projections? His rivals likely have similar blind spots. The founder anchored on her original customer segment? Her competitors probably face the same challenge.
This creates opportunity. Companies that systematically identify and challenge their anchors—that practice what I call “strategic re-anchoring”—gain significant competitive advantages. They:
● See market shifts competitors miss
● Price based on value while others price based on precedent
● Allocate resources to future opportunities while others optimize for past successes
● Negotiate better deals by controlling the anchoring process
The behavioral science research is clear: cognitive biases aren’t just academic curiosities. They’re systematic errors in judgment that cost real money and real growth (Tversky & Kahneman, 1974). But unlike many business challenges, you can address cognitive biases through awareness and process.
Your Next Step
This week, identify one decision where you might be anchored. Maybe it’s a pricing strategy based on what you charged five years ago. Maybe it’s a growth target derived from historical trends that no longer apply. Maybe it’s an operational metric that made sense at founding but constrains you now.
Then ask: What would I decide if I started fresh today, without that anchor?
The answer might surprise you—and it might just unlock the growth you’ve been missing.
Rich Smith is an award-winning CMO, Founder, and the host of the Revenue Science Podcast with decades of experience helping companies engineer predictable growth through the systemic application of Behavioral Marketing. Connect with him on LinkedIn or richsmiths.blog.
References
Antioco, J. (2011, April 25). How I did it: Blockbuster’s former CEO on sparring with an activist shareholder. Harvard Business Review. https://hbr.org/2011/04/how-i-did-it-blockbusters-former-ceo-on-sparring-with-an-activist-shareholder
Apple. (2010, January 27). Apple launches iPad [Press release]. https://www.apple.com/newsroom/2010/01/27Apple-Launches-iPad/
CNBC. (2020, September 22). Netflix didn’t kill Blockbuster—how Netflix almost lost the movie rental wars. https://www.cnbc.com/2020/09/22/how-netflix-almost-lost-the-movie-rental-wars-to-blockbuster.html
Giuliano. (2023, December 10). Anchoring bias in decision-making: The hidden influence on data storytelling. DataToStorytelling. https://datatostorytelling.com/anchoring-bias-in-decision-making-the-hidden-influence-on-data-storytelling/
Hammond, J. S., Keeney, R. L., & Raiffa, H. (1998). The hidden traps in decision making. Harvard Business Review, 76(5), 47-58. https://hbr.org/1998/09/the-hidden-traps-in-decision-making-2
Haque, T. (2018, September 10). Five hidden traps that can affect decision making. Entrepreneur. https://www.entrepreneur.com/growth-strategies/five-hidden-traps-that-can-affect-decision-making/319797
Harvard Business Review. (2013, August 21). What went wrong at J.C. Penney? https://hbswk.hbs.edu/item/what-went-wrong-at-j-c-penney
Koller, T., Lovallo, D., & Sibony, O. (2018, September 28). Bias busters: Being objective about budgets. McKinsey & Company. https://www.mckinsey.com/capabilities/strategy-and-corporate-finance/our-insights/bias-busters-being-objective-about-budgets
Northcraft, G. B., & Neale, M. A. (1987). Experts, amateurs, and real estate: An anchoring-and-adjustment perspective on property pricing decisions. Organizational Behavior and Human Decision Processes, 39(1), 84-97. https://doi.org/10.1016/0749-5978(87)90046-X
Randolph, M. (2019). That will never work: The birth of Netflix and the amazing life of an idea. Little, Brown and Company.
TIME. (2013, April 9). The 5 big mistakes that led to Ron Johnson’s ouster at JC Penney. https://business.time.com/2013/04/09/the-5-big-mistakes-that-led-to-ron-johnsons-ouster-at-jc-penney/
Tversky, A., & Kahneman, D. (1974). Judgment under uncertainty: Heuristics and biases. Science, 185(4157), 1124-1131. https://doi.org/10.1126/science.185.4157.1124
Variety. (2013, December 8). Epic fail: How Blockbuster could have owned Netflix. https://variety.com/2013/biz/news/epic-fail-how-blockbuster-could-have-owned-netflix-1200823443/
Additional Reading
ACE Alternatives. (2024, September 16). Why your first impression of a startup could be losing you millions! ACE Alternatives. https://www.ace-alternatives.com/why-your-first-impression-of-a-startup-could-be-losing-you-millions/
