Cognitive bias: The anchoring effect

NASDAQ:TSLA   Tesla, Inc
Picture on the left shows that a product costs $290.

While on the right side, the cost of the product is the same but it is stated that the original price is 400. Thus you got yourself a bargain.

Showing picture on the right has the chance of making people think that the product is actually cheap. Because you only pay $290 for a product that’s worth $400

This is called the anchoring effect. A cognitive bias whereby an individual's decisions are influenced by a particular reference point or 'anchor'.

In other words, we tend to rely heavily on the first piece of information in order to make decisions.

Daniel Kahneman in his book “Thinking fast and slow” is a great starting point if you want to learn more about this bias.

This anchoring effect might affect our investment this way:

So due to anchoring effect Tim lost opportunity to buy more because he was anchored to his avg instead of technical or even fundamental.

This concept is part of behavioral finance. A study of how emotions can influence our economic choices.

One way to avoid this bias is to be able to identify it and aware that as human, we tend to rely too much on the first piece of information that we have.

Hope this helps.


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