Question

18. Explain Anchoring Bias and how humans can tend to make judgment errors when trying to think quickly about a problem. How do we see examples of this play out in the real world (use two examples)?

Answer 1

Anchoring or focialism is a cognitive bias where an individual depends too heavily on an initial piece of information offered when making decisions. Anchoring occurs when, during decision making, an individual depends on an initial piece of information to make subsequent judgements.

Those objects near the anchor tend to be assimilated toward it and those further away tend to be displaced in the other direction. Once the value of this anchor is set, all future negotiations, arguments, estimates, etc are discussed in relation to the anchor. The bias occurs when interpreting future information using this anchor.

The anchoring effect is a cognitive bias that describes the common human tendency to rely too heavily on the first piece of information offered when making decisions.

1) Example of anchoring bias;

  If you first see a T- shirt that costs Rs 1200/- then see a second one that costs Rs 100/- you're prone to see the second shirt as cheap

2) Example of anchoring bias in finance;

  If i were to ask you where you think Apple's stock will be in three months, how would you approach it? Many people would first say, " Okay, where's the stock today ?" Then, based on where the stock is today, they will make an assumption about where it's going to be in three months. That's a form of anchoring bias. We're starting with a price today, and we're building our sense of value based on that anchor.