Anchoring Bias


This is clinging to a fact or figure that should have no bearing on your decision.  Often, we use an initial value or first piece of informationa as a “starting point” in decision making.  Even if the initial value was a totally random uneducated guess, we tend to be biased towards it.  Like your entry price at which you bought a stock.  You anchor to whatever price you bought a stock for, not realizing that the market neither knows nor cares what you think is a “fair” price.

Or you might think $1 million is a glamorously large amount of money when it’s what most people would need to cover their definition of a pretty mediocre retirement a few years down the road.  Many thanks to that beast of indirect government taxes, in some parts of the population, also known as inflation.  Incidentally, an inflation rate of 3% per year, though barely noticed but persisting for twenty years, cuts the value of your savings almost in half.  So how does one avoid the anchoring bias?  By going into decisions from multiple starting points and avoiding anchoring solely on the first piece of information.  By using several different anchors, one increases the odds of an objective/accurate decision.

And how does one do exactly the right thing at all times?  I don’t know.

Perhaps this talk could give you some ideas on how your natural mind tricks you and how you should handle “comparisons”: TED Talk by Dan Gilbert “Why we make bad decisions?” (24 interesting minutes followed by 10 minutes interview)

“Expected Value = Odds of Gain x Value of Gain.” — Daniel Bernoulli

“But we human beings like to compare with the past and not with the possible.” — Dan Gilbert

“If we’d understand our cognitive limitations in the same way as our physical limitations, we would be able to design a better world.” — Dan Ariely

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