What is anchoring and why it is important for your decision making
Have you ever made a really wrong decision and afterwards you were absolutely convinced that you should have known better? Here is a solution for to how analyzing you decision-making and maybe prevent some bias that our brain experiences.There are lots of situations in everyone’s life where you have to come up with big decisions.
Some people believe in determination or in a good that guides you, othertrust their intuition. But in the end we have to admit that many times our information is not enough to be able to make a competent decision. This blog post will give you an insight to what psychology found out about the human brain and its patterns of decision making. Furthermore I will point out why these patterns are immensely important to business and economics.
I want to introduce to you the term of anchoring. It describes the human bias to make decisions based on random pieces of information (such as numbers) they were confronted with before.
Maybe you remember the psychologists (Tversky, Kahneman) I cited in my first post on the endowment effect. They were pioneers in the field of cognitive bias, such as anchoring. Conducting several studies about it, they shaped the term in modern science. In their paper “Judgment under uncertainty, heuristics and Biases” they asked people to guess how many African nations were members of the UN. If they were asked at the beginning if it was more or less than 10%?” their answer to the Question was 25% on average. If they were confronted before with the number 65% they guessed 45% on average.
The same behavior can be observed for people who are making decisions in a market. For example at the stock exchange traders often have to decide if they want to sell or buy a share in many cases they lack of sufficient information to be able to find out what will be better for them.
In those situations people use the anchor. Carl Capolingua explaines in his article how that works in detail. He states that “Anchors keep our mind fixed to the one spot because they are a reminder of what was originally a good idea. For example, we may anchor a trade around our entry point of a stock because the price “looked good at the time”.
This means that traders often are reluctant to sell their shares that have lost value until they reache breakeven again. This irrational behavior often causes huge losses when those shares don’t recover but keep on falling in pricng effect.
There are even salespersons who while making contracts with you try to make a profit from the anchor effect. As Roger Dooley depicts in his article salespersons might suggest numbers to you before a business meeting to make you pay a higer price. Find out about it!
This Blog display how this strategie works in different areas like real estate business or gasoline prices.
If you are more interested in this topic, that is applicable to many fields of our life, I recommend you Predictably Irrational by Dan Ariely. He is a behavioral economist at Duke University who describes a lot of experiments that reflect on our behavior after this pattern. He covers themes like procrastination, cheating, and how we interpret prices.