How to Overcome Anchoring When Investing
Anchoring can lead to poor investment decisions. Here's how to help clients avoid it.
This is the 17th article in the Behavioral Finance and Macroeconomics series exploring the effect behavior has on markets and the economy as a whole and how advisors who understand this relationship can work more effectively with their clients.
When required to make an estimation, people generally begin by envisioning some initial, default number--an "anchor"--which they then adjust up or down to reflect subsequent information and analysis. This is referred to as anchoring bias, an information processing bias.