Anchoring

Present your brain with a number and ask to make an estimate of something completely irrelevant. For instance: write three last digits of your phone number and name the date Taj Mahal was built. Our brain anchor its estimate on that first number.

Negotiations

In negotiations, naming a high sell price for a business can help to secure an attractive outcome for the seller. Most likely, the buyer’s offer will be anchored around that figure.

Advertising

This is also present in advertising world. Most retail-fund managers advertise their funds on the basis of past experience. However, research show there is no correlation between past and future performance. When citing past performance, managers anchor the notion of future top-quartile performance in the customer minds.

Investments

Most investors trade stocks too frequently shifting mutual funds based on most recent advice of too many experts. Most people think too little about the type of assists they want in investment portfolios. They place too little of their long term investments in stocks.

Individuals use naive strategies for asset allocation, sticking what they and others have decide in the past. Investment decisions are fairly mindless. People place naive allocation and does not adjust their decisions, even if life circumstances change over time.

Usually, human beings choose investments allocating 50:50. Rather than being led naively by choices of their employees, investors should think carefully about their allocations.

Recommendations

Anchoring could be avoided when taking a long-term perspective. Put this in the context of the past 20 or 30 years and observe what are the actual trends.

Adapted from

Bazerman, M.H. and Moore, D.A., 1994. Judgment in managerial decision making (p. 226). New York: Wiley.

Common biases in decision making

In general there are three general heuristics namely availability, representative and confirmation heuristics. They encompass eleven specific biases.

Cognitive bias

Economists claim individuals are rational decision makers. They collect a lot of information, examine all alternatives and make decisions that maximise personal satisfaction. However, we do not make decisions in…

Heuristic definition

Individuals rely on rules of thumb (heuristics) to lessen the information processing demands of making decisions.

Availability heuristic

The inferences we make about event commonness based on the ease with which we can remember instances of that event.

Retrievability bias

We are better at retrieving some subjects from our memory than other things. Individuals base judgement on commonality and easier base strategies.

Base rate fallacy

People tend to ignore background information relevant to the problem such as base rate. We tend to assume that causes and consequences are related.

Gambler’s fallacy

Simple statistics claims each event in a sequence is equally likely to occur. But individuals believe random and non-random events will balance out.

Small sample size fallacy

Simple statistics state that we are more likely to observe an unusual event in a small sample compared to a large one. Learn more.

Conjunction fallacy

Describes how conjunction is judged to be more probable than a single component descriptor. Intuitively thinking, something appears to be more correct.

Loading…

Something went wrong. Please refresh the page and/or try again.