Anchoring is a cognitive bias in which an individual relies too heavily on the first piece of information they receive when making decisions or judgments. This initial piece of information is known as the "anchor" and can be completely irrelevant to the decision at hand. Anchoring can occur in both numeric and non-numeric forms.
Anchoring can have a significant impact on decision-making in various contexts, including investing, negotiation, and pricing. In investing, anchoring can cause individuals to hold onto investments that have lost value because they have anchored their fair value estimate to the original price rather than to fundamentals. In negotiation, anchoring can serve to determine an accepted starting point for subsequent negotiations. In pricing, anchoring can contribute to how customers perceive the value of an item and how they compare a product to alternatives.
Anchoring bias happens because people tend to favor information they received early in the decision-making process and hold on to this information as a reference point, failing to adjust their initial impressions even after receiving additional information. Anchors can be external or internal, with external anchors being reference points provided by others, and internal anchors being reference points based on beliefs, experiences, or contextual clues.
Although there is no consensus as to why anchoring bias happens, two mechanisms can help explain this phenomenon: anchoring and adjustment and confirmatory hypothesis testing. Anchoring and adjustment is the mechanism that explains how people try to answer a general knowledge question. Once an anchor is set, other judgments are made by adjusting away from that anchor, and there is a bias toward interpreting other information around the anchor.
To mitigate the effects of anchoring, some factors can be considered, such as considering the opposite and being aware of the bias. However, it is difficult to avoid altogether, even when people are made aware of the bias and deliberately try to avoid it.
