Our brains are getting us into trouble as lenders.
It’s because our brains cause us to be guilty of something called anchoring and we do it all the time in lots of different situations without even being aware of it. In our role as lenders, every time a client asks for an overdraft facility or a loan for a given amount, we do it then too. So what is it exactly and how do we avoid it?
Anchoring happens when someone mentions a specific number. It could be the number of coffee beans in a jar or a potential annual salary – once we get that number in our head we can’t shake it and every thought about the jar or the salary revolves around that particular number.
So in our world, a client comes to us and says “I’d like an overdraft facility of 500,000”. Immediately, we start to think about whether we can agree to that request. It rarely occurs to us that the client may not need that much or, possibly, that he might need a lot more. The 500,000 serves as an anchor around which we focus our thoughts and energies.
The correct response should be to first consider the client’s creditworthiness to see what level of overdraft facility his cash flow, balance sheet structure and so on could support. Then we can think about the 500,000 and how it relates to our analysis.
So that’s why you should forget the amount requested by the client initially. It’s not easy to do because anchoring is a very powerful force in our brains but it could lead to us making better decisions and saving ourselves work in the long run.