Have you ever walked into a market and bought strawberries for what you thought was under the “average price” only to realise later that week you could have bought them for a good deal less? Or have you seen a salesman set a high price for a car so that you negotiate down to a price still above its value? If this sounds like you, it could be argued that you could have been (or are) the victim of anchoring bias.
Anchoring occurs when we place too much weight on an initial piece of information and that piece of information becomes our reference point or “anchor”. This can distort our ability to make a rational decision. It is also known as a “priming effect” and is one of the most common and impactful biases in our everyday lives. It’s what psychologists Tversky and Kahneman call one of the big three.
Let’s examine a few real world examples…
Anchoring also impacts investors
Anchoring can impact experts as well. When examining long-term stock return expectations, financial market professionals and university students were both impacted by anchoring. The university students in particular, often anchored on the initial stock value as this was the first piece of information given to them. The study can be viewed here.
Lifting the Anchor with your Advisor
As advisors, we come across anchoring bias regularly. We’re all human and, whether we realise it or not, behavioural biases are something we all experience throughout our life. A great way to help us manage our biases is to continue to educate ourselves and be open to learning, and this is where a financial advisor can help.
We can look to the medical profession as a guide. Dedicated doctors increase knowledge through research, work on deductive reasoning skills, and consulting with experts and colleagues to reduce the impact of bias and deliver effective diagnoses.
Investment professionals apply a valuation model to find a “fair value” for a company’s share price. I’ve had clients tell me “That’s your job” when it comes to making those financial decisions and, while that is true, an advisor’s “job” goes beyond this. Our role as financial advisors is also to help you become aware of how you make financial decisions. This awareness empowers you to make smarter decisions over the long term.
Viridian Advisory prides itself in helping our clients become more aware of, and work through, behavioural biases such as “Anchoring”. The sole focus is to ensure the right decision is made for their personal circumstances. Your advisor is removed from the emotion and beliefs connected to your previous financial decisions. By adding an advisor to the equation, you can lift the anchor and set sail for an optimal life.
David Pitt is an Executive Advisor at Viridian Advisory.
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