Anchoring Bias, What Is It And How To Avoid It
Anchoring bias, like the name suggests, is an example of heuristics and biases, which I previously wrote about. It is important to understand how they affect your decision making process to avoid making bad ones!
What is anchoring bias?
Anchoring Bias is an important one to know and understand. Anchoring is a phenomenon where your mind subconsciously fixates on something, and then proceeds to compare new information to this anchor when making decisions. Depending on the anchor, this can result in less than optimal decisions.
Anchoring is actually a powerful effect. The anchor doesn’t need to be relevant to the decision being made, and it can be internal (come from ourselves) or external (come from someone else), and it can still skew our decision making.
How to avoid it?
Anchoring bias is pretty much impossible to avoid.
You can somewhat lessen the effect of it by being aware of it happening, and reasoning the anchor first before making a decision. By “reasoning the anchor” I mean that you could list some reasons why a price (for example) is or isn’t reasonable. But even then it is hard to fully negate its effect.
Anchoring bias and finance
Anchoring is a common occurrence in investment decisions.
For example, quite often people, myself included, will get stuck on the initial purchase price of a share and this will skew any further purchase or sale decisions.
If the price goes up you might feel unwilling to buy more because you feel like it is overpriced compared to the initial price you paid. On the other hand if the price goes down you’d be reluctant to sell because you wouldn’t get the perceived value back in return.
I mean, have you ever missed out on a sale of an item you really wanted and then felt like paying the regular price was too much? Even if you most likely would have been happy to pay the regular price had you not seen the sale?
Well, that’s anchoring playing tricks on your mind! Anchoring is also important to keep in mind when it comes to salary negotiations, or any other sales negotiations for that matter.
The first number that is said becomes the anchor and can seriously affect the end result.
A very common use of anchors are in property sales. “Enquiries over xxxK” is an often used phrase. This price provides an anchor for the offer prices and majorly impacts the offers that the sellers receive. It is probably fairly obvious how big impact the “enquiries over” has on the price!
You can read more about Anchoring Bias here.
Can you think of an occasion where you made a unfavourable decision under the influence anchoring bias? Or almost made such a decision but caught yourself? I would love to hear in the comments!
