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Moxreports.com focuses on reverse engineering the tactics and strategies used by hedge funds and insiders in the capital markets.
Featured Report
December 11, 2018 | RP
anchor
Anchoring bias

Anchoring bias.  People have a strong tendency to perceive prices as “belonging” within a range once that range has been previously established.  Anchoring refers to our propensity to attach our thoughts to a reference point even if that point has no basis in logic.

Anchoring is an extremely difficult bias to avoid or eliminate, even when people are expressly informed of it and even when they are offered monetary incentives to refrain from falling into it.

The effect of accuracy motivation on anchoring and adjustment: Do people adjust from provided anchors?.
(Journal of Personality and Social Psychology. Dec 2010)

Negotiating the price of a car is an example of this behavior.  The buyer views the listed price of the car as the ceiling and negotiates lower while the seller tries to stay as close as possible to the earlier listed price.  The buyer rarely considers the logic around the sellers listing price but nonetheless negotiates around that price which in fact had been set by the seller. The same person may then focus too heavily on the odometer or the year of the car as their basis for pricing, rather than consider more qualitative factors like the engine condition or the maintenance history.

Anchoring bias in decision-making (Science Daily)

Anchoring can lead to some very bad investment decisions.  For example, if the price of, say Bitcoin, suddenly drops far below earlier peaks, many investors may be strongly tempted to buy the dip.  These investors are anchored to the earlier, much higher price of Bitcoin so they consider it “cheap” at the much lower levels.  These investors fail to realize that if the Bitcoin prices seen in the past had themselves been unjustifiably high for some reason, then those earlier highs are not a meaningful reference at all for evaluating current prices.

“Lower price” does not necessarily indicate “cheap” in terms of investment value, but many investors tend to instinctively buy the dip regardless.

 

 

 

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Neither Moxreports.com nor Richard Pearson is a registered investment, legal or tax advisor or a broker/dealer. All investment and financial opinions and other content expressed on this site are intended to be used and must be used for educational and/or informational purposes only. Readers are encouraged to conduct their own analysis before making any investment based on such reader’s personal circumstances. Readers are encouraged to take independent financial advice from a professional in connection with, or independently research and verify, any information found on this website. Most of what is written on this site will reflect a preexisting bias since the author is often writing about situations where he had already felt strongly enough to commit money to a trade. The author will often continue to trade in these securities for an extended period of time after publication. Market conditions and issuer specific facts may change and may result in the author closing positions or, in some circumstances, changing direction of the trade vs. the position originally reported. The author assumes no duty to update any published information and readers should not expect that any updates will be provided regardless of any changes in market conditions, security prices, the author’s investment positions or other factors. Things like links and screenshots are included using sources which the author believes to be reliable. However, occasionally unintended errors, inaccuracies and misprints may occur. The author makes no guarantees regarding the accuracy or timeliness of any information published on this site or with respect to any third-party information sources.

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