ANCHORING and ADJUSTMENT: Easy explanation.
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Published 2022-09-13
#anchoring #adjustment #wallstreetmojo #decisionmaking #cognitivebias #subconscious
Chapters:
00:00 – Introduction
00:24 – What are anchoring and adjustment?
01:23 – Mechanism
02:27 – Anchoring and adjustment examples
03:19 – Anchoring and adjustments heuristics in finance
03:56 – Conclusion
What are anchoring and adjustment?
When one gives a person a piece of information initially, they stick to that or anchor it while making any decision. It is known as anchoring.
A person may deviate from the anchor and make some adjustments. But they shall always stay within the purview of the anchor, and any decision they take will be in line with the anchor.
(Explained in detail in the video)
Mechanism
Anchoring is a cognitive bias where people rely more on the facts when making decisions.
While anchoring is a cognitive bias, adjustment to an anchor is a conscious decision that a person takes.
Adjustment may allow a person to deviate from the anchor, but it shall always stay within a range that is in line with the anchor.
Now, one may induce this concept of anchoring and adjustment in 2 ways:
Anchoring via suggestion – When someone else gives the information, it becomes the anchor.
Subconscious anchoring – When one is given information by anyone else, the anchor is set subconsciously by the person taking the decision.
Anchoring and adjustment examples
The concept of anchoring and adjustment can be seen in how used car salesman and clients negotiate the value of a car.
The same can be seen in salary negotiations between hiring managers and candidates.
(Explained in detail in the video)
Anchoring and adjustment heuristics in finance
This concept of anchoring and adjustment can be observed in finance too. But unfortunately, financial analysts often let their cognitive biases creep in while they prepare financial models.
According to Phillip Tetlock, a financial analyst would better prepare a financial model if they took multiple ideas or perspectives into consideration rather than sticking with one idea only.
(Explained in detail in the video)
This was all about anchoring and adjustment. So, please like the video and subscribe to the channel so that you don’t miss the content we come up with regularly.
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