GMAT Verbal 31: Main Idea and Primary Purpose

Ask people whether the population of a city is more or less than five million, then ask them to estimate it, and their estimates will be pulled toward five million — even if they know the number was chosen at random. Psychologists call this effect anchoring. In a well-known experiment published in 1974, Amos Tversky and Daniel Kahneman spun a wheel of fortune that was rigged to stop at either 10 or 65, and then asked participants to estimate the percentage of African countries in the United Nations. Those who had seen 10 gave a median estimate of 25 percent; those who had seen 65 gave a median estimate of 45 percent. A number that participants could see was meaningless still moved their answers by twenty points.

Anchoring matters well beyond the laboratory. In negotiations, the first price mentioned tends to shape the final agreement, which is why many negotiators advise making the first offer rather than waiting for one. Retailers display a high original price beside a sale price for a similar reason: the higher figure makes the discount look larger.

Yet the effect is not unlimited. Later research has found that anchors work best when people are uncertain; an expert who knows a market well is harder to move than a newcomer, though rarely immune. For managers, the practical lesson is less that anchors can be avoided than that they should be noticed — and that the first number on the table deserves more scrutiny than it usually receives.

When Muhammad Yunus began lending small sums to poor villagers in Bangladesh in the 1970s, conventional banks considered such borrowers too risky to serve: they had no collateral and no credit history. Yunus's answer, developed into the Grameen Bank, was to lend to small groups, mostly of women, whose members met regularly and whose access to future loans depended on the group's repayment record. Repayment rates were high, and in 2006 Yunus and the bank shared the Nobel Peace Prize.

By then, microcredit had become one of the most celebrated ideas in development, and many supporters claimed that it could lift millions of families out of poverty. Careful evaluation told a more modest story. In the 2010s, randomised studies in six countries, which compared areas that gained access to microloans with similar areas that did not, found that borrowers often started or expanded small businesses but that, on average, household income and consumption did not rise substantially.

None of this means that microcredit failed. The same studies suggested that loans gave many households more freedom in how to spend and invest, and that a minority of borrowers who already ran businesses gained a great deal. What the evidence did undermine was the claim that a small loan is, by itself, a reliable route out of poverty.