This is a separate page of the A section of the Glossary
Behavioral finance FAQ / Glossary (Anchoring)
Dates of related message(s) in the Behavioral-Finance group (*):
Year/month, d: developed/ discussed, i: incidental
00/6i,8i,9i,11i- 01/5i,8i - 02/8i,11i - 03/3i,6i - 04/5i;7i - 06/11i + see adjustment, tunnel vision, dominant mental interest, reference point, selection bias + bfdef2
Not bothering to look for several ideas, when the mind has already one in store.
Not bothering to navigate in the sea of numbers when cozily harbored in one.
Definition: mental anchoring
is a bias in which the mind is focused on only one simplified reference point:
This single reference / anchor can be:
One numerical value
A case often found in economics and finance, as detailed in this article.
In other words an obsolete heuristic (see that word)
This exclusive mental reference point plays at the detriment of an objective and complete observation and analysis. This reductive psychological phenomenon (a type of heuristic) is also called anchoring bias / focalism / focusing effect...
It is normally (but not always) followed after a while, when it starts to appear unsustainable, by a mental adjustment (see that word).
Effects of anchoring
Not easy to sail when the anchor gets stuck.
When the mind is anchored on a reference it tends to solidify into a tunnel vision and to be
blind to signals that contradict that reference. It neglects facts and ideas that do not confirm this "prior", which often has no logical and objective basis.
The brain does not adjust (**) that reference to new events, or it adjusts it only slightly.
(**) The phrase "anchoring and adjustment" is often used to stress the opposition (and also continuity) between the two notions (see "adjustment").
Anchoring is an extreme form of heuristics (see that word) for making new decisions. It is one of the main cause of underreaction (see that word).
Anchoring could affect either an individual or the whole collectivity ("dominant anchoring"), thus have an effect on social events.
Anchored in a number. But does that number means something or is it drawn from a hat?
Economic and financial prospects (see "prospect theory") are fields in which the anchoring notion is mostly used.
More specifically, in investment, the reference can be:
purchasing price.
Whatever the facts or beliefs that led to that anchoring number, it has become a reference point of "value" (see also prospect theory).
Mental anchors in investing are those reference values that people keep in mind and that keep influencing their decisions.
The first one to take hold of the neuron keeps the neuron.
Those references can come from gradual learning, but this is not the only source of anchoring
It happens often that people create instantly their mental anchor when they get a
first perception of things (or of people), or see the most salient information (see saliency) without waiting for enough data (primacy / priming effect).
Their mind gets stuck in their initial understanding whatever new data they get later.
A romantic remembrance of its first date with the asset.
Committed? Or too lazy to reassess?
One way to explain that anchoring persist after the first perception is that people could feel committed
(see commitment) to their first move.
They prefer to rationalize (= find good reasons for) this commitment than to change their belief (see cognitive dissonance).
Another motive of anchoring is that people can balk at the complex cognitive task that is needed to
reanalyze and adjust one's prior estimate of prospects and risks.
This reassessment would need to dig deep into various aspects such as:
For example an oversimplification in considering the factors involved (see availability heuristic)?
When the investment sea changes, why stay anchored in old waters?
Investors are often mentally anchored on
past prices, but also on past market situations, past estimates or past practices / strategies.
This has an incidence, as a brake or as an accelerator, on their behavior
1) As those investors stay anchored on a past reference, stick to some previous over-simple or over-elaborate analysis / decision processes (*).
while the world is not static and the present situation usually differs, slightly or largely, from previous ones,
under-react, to keep more or less their same behavior (see also "status quo bias").
2) Later those investors adjust their attitude, but they do not stop there and they tend to
overreact
Thus their anchoring changes into a new one that takes into account more recent events (see recency effect, short memory...).
(*) However useful you might find those thought habits, see them as food with a "best before" date when to scrape them. More seriously, look closely at their assumptions. Between you and me, the old market assumptions, trends, practices and paradigms which become obsolete might come back much later. Markets often evolve in spirals.
Starting blocks for haggling.
A business negotiation starts normally by one of the sides (the seller or the buyer) by offering a price, which becomes a kind of anchor.
A two-edged practice can be to propose at the start an unrealistic price. Here, two possibilities:
Either the counterpart immediately runs away,
Or, often, it becomes the reference point for haggling.
(*) To find those messages: reach that Behavioral-Finance group and, once you are there, 1) click "messages", 2) enter your query in "search archives".
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