Thursday, November 12, 2009

The Psy-Fi Blog: Anchoring, The Mother of Behavioral Biases

The Psy-Fi Blog: Anchoring, The Mother of Behavioral Biases:

"Anchoring is an easy-to-demonstrate, hard-to-eradicate behavioural bias that has all sorts of nasty implications for investors, many of them not obvious. In fact, along with availability, it has the claim to be the mother of all biases.

The fundamental investment problem lies in the difficulty in deciding what something is intrinsically worth. A skilled negotiator will start from an extreme position, such as a very high price, in order to frame the subsequent discussions. Anywhere and anytime someone presents us with a number in order to start negotiations we’re being anchored. So if it really matters then you need to start from your own number or walk away."

Great article which more or less sums up our entire behavioral finance class of last night and adds better examples etc. Class, consider this one mandatory!

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