What is Anchoring And Adjustment?
1467 reads · Last updated: December 5, 2024
Anchoring and adjustment is a phenomenon wherein an individual bases their initial ideas and responses on one point of information and makes changes driven by that starting point. The anchoring and adjustment heuristic describes cases in which a person uses a specific target number or value as a starting point, known as an anchor, and subsequently adjusts that information until an acceptable value is reached over time. Often, those adjustments are inadequate and remain too close to the original anchor, which is a problem when the anchor is very different from the true answer.
Definition
Anchoring and adjustment refer to the phenomenon where individuals base their initial perceptions and reactions on a specific piece of information and adjust from that starting point. The anchoring and adjustment heuristic describes how individuals use a specific target number or value as a starting point (the anchor) and adjust this information over time until reaching an acceptable value. Typically, these adjustments are insufficient and remain too close to the original anchor, which becomes problematic when the anchor is significantly different from the true answer.
Origin
The concept of anchoring and adjustment was first introduced by psychologists Amos Tversky and Daniel Kahneman in the 1970s. They demonstrated through a series of experiments how people rely on initial information points in decision-making processes. This concept has been widely applied in behavioral economics to help explain decision-making under uncertainty.
Categories and Features
Anchoring and adjustment can be divided into two main types: external anchoring and internal anchoring. External anchoring refers to the influence of external information, such as market prices or expert opinions. Internal anchoring is based on an individual's own experiences or memories. The main feature of anchoring is the strong influence of the initial anchor on the final decision, even if the anchor may not align with the actual situation.
Case Studies
A typical case is the pricing strategy in the real estate market. Sellers often set a high initial price (anchor) with the expectation that buyers will make smaller adjustments during negotiations, resulting in a higher sale price. Another example is analysts' forecasts in the stock market. Analysts may set an anchor based on past performance and adjust from there, but if market conditions change significantly, these adjustments may not adequately reflect the true situation.
Common Issues
Common issues investors face when applying anchoring and adjustment include over-reliance on the initial anchor, leading to decision biases. Additionally, improper anchor selection can result in incorrect investment judgments. To avoid these issues, investors should analyze information from multiple perspectives and avoid the influence of a single information source.
