Unlike the conservatism bias, which has similar effects but is based on how investors relate new information to old information, anchoring occurs when an individual makes new decisions based on the old, anchor number. Anchoring can be used to advantage in sales and price negotiations where setting an initial anchor can influence subsequent negotiations in your favor.Īnchoring is a cognitive bias described by behavioral finance in which individuals fixate on a target number or value-usually, the first one they get, such as an expected price or economic forecast.Awareness of anchoring, monetary incentives, giving careful consideration to a range of possible ideas, expertise, experience, personality, and mood can all modify the effects of anchoring.Anchoring and adjustment have been shown to produce erroneous results when the initial anchor deviates from the true value.Anchoring and adjustment is a cognitive heuristic where a person starts off with an initial idea and adjusts their beliefs based on this starting point. Research on anchoring as a phenomenon commenced immediately after Tversky and Kahnemans (1974) seminal work and has yet to let up.People tend to judge the value of the product in relation to the discount they get off the anchor price rather than the actual cost, as they will be more naturally interested in the difference between the anchor and the sale price rather than the absolute value of the product in question. Numerous examples of the Anchoring effect can be found in the commercial sector: during sales, it is common practice to show the original price crossed out with a sale price right below it in order to give customers the anchorage point of the higher pre-sales price and make it seem like a good deal comparatively. The experiment showed that the two groups gave significantly different answers – of 50 and 67 respectively – precisely because they had been influenced by the anchoring age values initially given.

The first group were asked whether they thought he died before or after age 9, and the second group before or after age 140 (both anchors far removed from reality as Gandhi actually died at 87 years old). In one study, two groups of students were asked to guess at what age Mahatma Gandhi died. You tune into a political debate and hear one. Many experiments have shown that it is difficult to avoid the Anchoring effect, as it affects our thinking even when we’re unaware of it. Having this anchoring point shapes our judgement creating either a positive or negative bias toward what we develop ourselves.

The Anchoring effect will affect the way we negotiate, the prices we consider to be acceptable, the quality or value we perceive goods to hold, etc. In other words, through the anchoring effect, we use ‘anchors’ or reference points to make decisions, rather than thinking rationally and objectively to make the best decision overall. Once an anchor is set, judgements are made by using this anchor as a point of reference and are more often than not biased by whatever this anchor happens to be. Anchoring therefore occurs when individuals use an initial piece of information in order to make subsequent judgements. The human mind does not consider the value of something based on its intrinsic value but rather compares different things against one another, making decisions based on these comparative values.

The Anchoring effect, first studied by Tversky & Kahneman (1974), is a cognitive bias that causes people to rely too heavily on the first piece of information they receive as a point of reference.

The anchoring