In February of 1992, Stella Lieback of Albuquerque, New Mexico went to McDonalds and ordered a cup of coffee.  Lieback was in the passenger seat of the car and when the driver drove forward, her coffee spilled all over her.  Lieback suffered third-degree burns on over 16% her body.  She had to get skin grafts, along with other treatment, while being hospitalized for eight days.  Lieback decided to sue McDonald’s for $20 million dollars for compensation for the coffee being “too hot.”

Why would Lieback demand such a large amount in compensation fees?

This is because of the anchoring effect.  The anchoring effect refers to the “practice of using one high priced product or service option (an anchor) to make everything else cheaper in comparison.”  Many types of people use this principal to their full advantage all of the time.  In the case of lawyers, they will sue for absurd amounts of money to get the compensation they actually want.  In the case with Lieback, they ended up settling for $2 million—which sounds like a much better deal than $20 million.  In reality though, $2 million is a lot of money for the given situation.

Marketers use the anchoring effect all of the time.  For example, when there is a sale, stores will clearly state the original price of the product (this being the “anchor”) right next to the sale price.  Our decision making process is affected by this as, instead of considering the item’s intrinsic value, we consider the value in comparison to the given value in the situation.  Therefore, getting a pair of $200 jeans on sale for $150 seems like a great deal because you saved $50, but, in reality, $150 for a pair of jeans is still (relatively) a lot of money for a pair of jeans.

You can also see the anchoring effect used by street vendors.  Street vendors sell their items for a large amount of money, only to decrease the price by 50% when you try to walk away.  This is in an effort for the customer to feel like they are getting a good deal on that item.