There are various researches that prove humans are extremely sensitive to the opinions experts offer on the news shows. You can also stay clear of this bias by being careful with the experts’ commentary. If there is a situation when an investor needs to use anchors, then also it is best to replace or back them with quantifiable data. Certain anchors, such as valuation multiples and historical values, may mislead investors. One can also overcome anchoring bias by rejecting some anchors. So, carrying out thorough research is a good way to overcome bias. One major reason for a bias is the existence of uncertainties. ResearchĪnother way to avoid bias is to conduct a lot of research. They do this because their decision gets influence by the anchoring bias, and they don’t trust their own due diligence. In such a case, an investor may try to change their valuation to be in line with the market. There are also cases when investors value a stock using the valuation technique, and the number they get is very different from the actual stock price. Moreover, if the stock price goes up or falls, investors must also refer to the fundamentals to make decisions. One way of critical thinking is that an investor must use reasoning and valuation principles (such as DCF) rather than basing their decision on just the current stock price. Such an approach would give investors a broader view of the market. Thus, a rational investor must always try to develop rigorous critical thinking.Ĭritical thinking means that if all are talking good about a stock or any other financial instrument, then one should try to dig out negative points as well. So, they may or may not help investors arrive at the right decision. One issue with the use of anchors is that they do not always give intrinsic value. A few of them could be: Critical Thinking There are psychological and factual ways to avoid this bias. It is clear that the anchoring bias influences the investment decisions, which may lead to a wrong investment decision. In such cases, it is the anchoring effect that pushes investors to the stock’s purchase price. In this, investors sell the shares whose prices go up and retain those whose prices go down. Disposition bias is also regarded as an anchoring bias effect.If the interviewer offers you only 45,000, you may find yourself making a counteroffer of. Another example of the anchoring bias, imagine you enter a job interview hoping for a salary of 75,000. This is especially the case when the bargaining zone is unclear.
Thus, it moves to a new price using the earlier stock price as the anchor. The anchoring bias is considered a bias because it distorts our judgment. When a company announces its earnings, the stock price usually underreacts to this news. The drift in the prices of stocks after the announcement of financial results or earnings is another common impact of anchoring.These decisions could be ignoring an undervalued investment or holding onto an overvalued investment for more time. Another effect is that it may push investors to make sub-par decisions.This may push them to hold on to the investment for more time than they should. Due to the anchoring effect, investors relate the fair value of a stock to the current price rather than fundamentals.An anchoring bias, as one can expect, may influence an investor’s decision in several ways.
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