CandleFocus Glossary Editor
The concept of “anchoring” is a popular psychological and behavioral finance term used to describe an irrational bias towards an arbitrary benchmark figure in investment decision making. It occurs when a market participant uses the initial figure as their reference point and bases their future decisions on that initial figure, instead of more recent or up-to-date information. This skews the decision making process by potentially disregarding more profitable market movements and opportunities.
Anchoring comes from the idea that our initial beliefs outlast subsequent evidence in decision making. A commonly explained example of anchoring is an individual guessing the number of countries in the world. If someone speculates that there are 120 countries, they’re less likely to guess a larger number, regardless of the evidence given to them afterwards. Essentially, the initial 120 has become their anchor.
Anchoring can also be used in sales and price negotiations. Selling a car, for example, the car salesman may initially anchor a higher price than what the car is worth in order to have the bargaining power in negotiations. By anchoring the higher price, the customer's final negotiation is likely to be more inclined towards a more desirable figure for the seller.
Thus, anchoring is a significant factor in influencing our decision making around investments. Psychologically, we are drawn to the powerful influence of the initial price figure and therefore do not feel comfortable with any other outcome or scenario. As such, it is important to be aware of this psychological phenomenon and strive to think rationally and objectively when decision making while investing or selling.
Indeed, anchoring can tend to mislead investors due to their reliance on the initial figure, rather than more recent information. However, anchoring can also be used to an investor's advantage. The investor can be aware of the psychological phenomenon of anchoring in order to make better and more informed decisions. This can be done by setting an anchor beforehand in a logical and rational way that is suitable for the changing market conditions that exist. Additionally, sellers can use anchoring as a tool to set prices and goals higher in order to have the upper-hand in negotiations.
Overall, anchoring is a powerful psychological effect on decision making, not only regarding investments but also sales and price negotiations. Knowing what anchoring is, how it works, and how it influences decision making can be a useful tool for those who are aware and educated on the subject.
Anchoring comes from the idea that our initial beliefs outlast subsequent evidence in decision making. A commonly explained example of anchoring is an individual guessing the number of countries in the world. If someone speculates that there are 120 countries, they’re less likely to guess a larger number, regardless of the evidence given to them afterwards. Essentially, the initial 120 has become their anchor.
Anchoring can also be used in sales and price negotiations. Selling a car, for example, the car salesman may initially anchor a higher price than what the car is worth in order to have the bargaining power in negotiations. By anchoring the higher price, the customer's final negotiation is likely to be more inclined towards a more desirable figure for the seller.
Thus, anchoring is a significant factor in influencing our decision making around investments. Psychologically, we are drawn to the powerful influence of the initial price figure and therefore do not feel comfortable with any other outcome or scenario. As such, it is important to be aware of this psychological phenomenon and strive to think rationally and objectively when decision making while investing or selling.
Indeed, anchoring can tend to mislead investors due to their reliance on the initial figure, rather than more recent information. However, anchoring can also be used to an investor's advantage. The investor can be aware of the psychological phenomenon of anchoring in order to make better and more informed decisions. This can be done by setting an anchor beforehand in a logical and rational way that is suitable for the changing market conditions that exist. Additionally, sellers can use anchoring as a tool to set prices and goals higher in order to have the upper-hand in negotiations.
Overall, anchoring is a powerful psychological effect on decision making, not only regarding investments but also sales and price negotiations. Knowing what anchoring is, how it works, and how it influences decision making can be a useful tool for those who are aware and educated on the subject.