anchoring bias

Syllable breakdown

Dictionary meaning

the cognitive tendency to rely too heavily on the first piece of information encountered — the anchor — when making estimates or decisions, with subsequent judgements insufficiently adjusted away from that initial anchor even when it is arbitrary, irrelevant, or misleading; anchoring was demonstrated by Kahneman and Tversky in experiments where spinning a wheel of fortune before asking factual questions caused participants to adjust their answers toward the random number the wheel stopped on; in financial contexts anchoring manifests as investors' tendency to judge a stock's current price relative to its 52-week high or its original purchase price — an anchor — rather than fundamental value; real estate buyers anchor on asking prices when making offers; salary negotiators gain advantage by making the first offer, setting an anchor the other party adjusts from; analysts anchor on prior-year earnings when forecasting; purchase price anchoring causes investors to refuse to sell a stock below the price they paid, waiting for recovery to the anchor even when the position should be closed

Examples

• Anchoring bias caused investors to view a stock as cheap at $80 because it had previously traded at $120, ignoring that fundamentals had deteriorated.
• In salary negotiations, anchoring bias means the party who states a number first tends to obtain an outcome closer to their stated figure.