Anchoring
Anchoring is a heuristic in behavioral finance that describes the subconscious use of irrelevant information, such as the purchase price of a security, as a fixed reference point (or anchor) for making subsequent decisions about that security. Thus, people are more likely to estimate the value of the same item higher if the suggested sticker price is $100 than if it is $50.In sales, price, and wage negotiations, anchoring can be a powerful tool. Studies have shown that setting an anchor at the outset of a negotiation can have more effect on the final outcome than the intervening negotiation process. Setting a starting point that is deliberately too high can affect the range of all subsequent counteroffers.
Definition: The anchoring effect is a heuristic method in behavioral finance that describes how people subconsciously use irrelevant information as a fixed reference point (anchor) when making subsequent decisions about a security. Therefore, if the suggested price is $100, people are more likely to estimate the value of the same item higher than if the suggested price were $50.
Origin: The concept of the anchoring effect was first introduced by psychologists Amos Tversky and Daniel Kahneman in the 1970s. Through a series of experiments, they discovered that people tend to be influenced by initial information when making decisions, even if that information is irrelevant to the decision.
Categories and Characteristics: The anchoring effect can be divided into two categories: explicit anchoring and implicit anchoring. Explicit anchoring refers to clearly given reference points, such as an initial offer in a negotiation. Implicit anchoring refers to underlying, unstated reference points, such as the prevailing market price level. The characteristic of the anchoring effect is that it influences people's judgments and decisions, making them biased towards values close to the anchor.
Specific Cases: 1. In the real estate market, sellers often set a high initial asking price in the hope that buyers' counteroffers will also be higher. 2. In salary negotiations, job seekers may propose a high expected salary to secure a higher actual salary in the final negotiation.
Common Issues: Investors may encounter issues when applying the anchoring effect, such as: 1. Choosing an inappropriate anchor, leading to biased decisions. 2. Over-reliance on the anchor, ignoring other important information. A common misconception is that the higher the anchor, the better. In reality, an excessively high anchor may lead to a breakdown in negotiations.
