Behavioral Finance and Your Portfolio

10Information Processing Bias #2: Anchoring Bias

To reach a port we must sail, sometimes with the wind, and sometimes against it. But we must not drift or lie at anchor.

—Oliver Wendell Holmes

Bias Description

Bias Name: Anchoring

Bias Type: Cognitive

Subtype: Information processing

General Description

When required to estimate a value with unknown magnitude, people generally begin by envisioning some initial, default number—an “anchor”—which they then adjust up or down to reflect subsequent information and analysis. The anchor, once fine-tuned and reassessed, matures into a final estimate. Numerous studies demonstrate that regardless of how the initial anchors were chosen, people tend to adjust their anchors insufficiently and produce end approximations that are, consequently, biased. People are generally better at estimating relative comparisons rather than absolute figures, which this example illustrates.

Suppose you are asked whether the population of Canada is greater than or less than 20 million. Obviously, you will answer either above 20 million or below 20 million. If you were then asked to guess an absolute population value, your estimate would probably fall somewhere near 20 million, because you are likely subject to anchoring by your previous response.

Example of Anchoring and Bias

This chapter reviews one miniature case study and provides an accompanying analysis and interpretation that will demonstrate investor potential for Anchoring Bias.

Miniature ...