The experts who come on any news channel program and talk about any particular sector or industry make investors anchored to their information, which might not be accurate. Misleading because it makes the current price look cheap, even though the security could still be overvalued.Īnalyst forecasts also serve as powerful anchors. For example, the highest price ever paid for a security will be a misleading anchor.
Many investors anchor their choices based on irrelevant figures or statistics. This initial information is "anchor." Then they adjust this anchor up or down according to the further information they might receive. While buying any stock, many investors first start by seeing the 52 weeks high or low price of that particular stock. However, this might not be true. This is known as price anchoring, which companies use to increase their sales. While shopping on online platforms, have you ever noticed that the MRP is always higher for most of the items, then there is a discount price, and at last, they show how much you are saving?īut the reality is when you see the higher MRP, you start believing that the item is costly and you are getting a good discount on that item. Effect of Anchoring Bias on our investments
Likewise, we usually interpret that if a person is wearing glasses is intelligent, which may or may not be the case. But this might not be the case as there might be a possibility that the person with expensive accessories might have rented those. On the other hand, if we see somebody with expensive clothes and accessories, we think that he/she is rich. Anchoring bias occurs when an individual offers importance to unnecessary details, which leads to errors in decision-making.Ī widespread example of anchoring bias is when we see any individual with shabby clothes we automatically tend to assume that he might be poor or a financially weak individual. And one of the most common systematic biases that influence individuals' predictions is "anchoring" or choosing forecasts.Īnchoring bias indicates that an individual relies too much on the recent or initial information which has been given to them and makes decisions based on the same information. Here, an irrelevant anchor has influenced their thinking.Īmos Tversky and Daniel Kahneman in 1974 found out that the predictions of different individuals are prone to a systematic bias, which leads them to predictable forecast errors. The highest estimates came from people who had spun high numbers on the wheel. Their guesses confirmed the anchoring effect. Later, he asked people to estimate how many African countries were part of the United Nations. He took a spinning wheel and asked his participants to spin it. What is Anchoring Bias?Ī psychologist Amos Tversky experimented to see the effect of anchoring on individuals' decision-making. We start with something that we know and move on to unfamiliar territories. Whenever we try to guess something, we use anchors. We found a reference point, in this case, in 1947, as the year of Indian independence, and walked towards an educated guess. Whatever the correct answer may be, the point of this example is the way we derived our solution. So let's assume that he was around 80 when he died-making 1888 our year of estimate when he was born. And in all the pictures you have ever seen of him from that time, he looked pretty old. How would you find out? Perhaps you know that India got independence in 1947 and that he was assassinated the next year in 1948. Do you know when Mahatma Gandhi was born? Let us suppose you don't have the year in your head, and your smartphone battery has just died.
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