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Anchoring bias is a systematic thinking error referred to as a cognitive bias in psychology. An anchoring bias happens when you rely too much on the first piece of information you learn about something when making decisions or predictions. This bias comes into play with your finances especially when making investments or purchases.
Before you can conquer an anchoring bias, you need to better understand how and where it shows up in your life.
Anchoring Bias Impact
It’s important to consider your "why" when investing, purchasing or shopping. Being aware of your anchoring biases can ensure you're making wise financial decisions.
An anchoring bias happens when you rely too much on the first piece of information you learn about something when making decisions, investments or predictions.
Anchoring biases are all around us — they happen when we shop, invest or even during salary negotiations.
Once you recognize where anchoring biases are showing up in your life, you can overcome them and make better financial decisions.
Just like your mood can impact your spending habits, so can anchoring bias. We make financial decisions based on anchoring bias without even realizing we are doing it. It happens in our subconscious minds and the result can lead to poor financial planning, unwelcomed debt and stress.
With anchoring bias, any new information about the investment or item you are considering goes back to that first point of reference.
Our subconscious mind plays a larger role in our decision-making than we realize. Here are four examples of anchoring biases.
If you see a sweater you’d like and then note the high $100 price tag and decide not to purchase it, that action goes into your memory bank. As you browse other sweaters, you may end up buying a $50 sweater simply because it’s half the price of the $100 sweater even though it’s not what you really wanted.
Imagine you are shopping around for a new insurance company. As you’re searching online, you come across a brand you recall seeing its commercials and slogans. For example, you might have heard, “our claims are the best!” That slogan is anchored in your memory, and you are likely to perceive it to be true when it could be false. To avoid this, compare quotes from multiple car insurance companies and assess the information you’ve compiled to find the best option for your needs.
When it comes to investing, financial planners often see clients who base their financial future based on emotions rather than investment fundamentals. One way to avoid making preconceived and emotional financial decisions is to become aware of your anchoring biases. Learn what information influences your decision making, such as past memories, family and friend impressions or strong advertising exposure. Being financially self-aware can help decrease emotional financial decisions and lead to making more fact-based choices.
During salary negotiation, you can use anchoring bias to your advantage. When interviewing for the job, state your “high benchmark” salary. That way, if they do make you an offer, the hiring team will know what salary you want and may consider that during salary negotiations.
There are four key strategies you can use to avoid anchoring bias and create more "mental wealth and financial stability" in your life today.
I ascribe to the theory of abundance; there is more than enough money, opportunity, goodness, love and other resources for all of us. Therefore, when we have more, it doesn’t mean somebody else has less. Abundant thinking can create new income streams and increased revenue for you while providing more for others,such as jobs, internships, sliding fee or pro bono services and charity. Abundance isn’t selfish; when you have more, you can help more. A friend who had breast cancer had one doctor give her treatment options. Because she had an abundant mindset, she asked five more doctors before choosing the right regimen for her.
The opposite of an abundant mindset is a scarcity mindset. Having a scarcity mindset might exacerbate your tendency to have an anchoring bias because you are only looking at the one option you know rather than an abundance of options and choices. Shifting from a scarcity mindset to an abundance mindset opens doors to possibilities, collaborations, celebrating the successes of others and greater prosperity.
Being present can make you more financially conscious and mindful. By doing so, you begin to notice your thoughts and feelings and become aware of what you might be denying or not seeing because of anchoring bias.
When you apply mindfulness to your financial life, you can make decisions from a place of peace, groundedness and clarity. Reconnect with the fire inside your heart when facing important choices and decisions through quiet reflection, meditation, mindfulness and presence. Let your inner light be your guide.
The dictionary defines detachment as being aloof, distant or uncaring. While some think of detachment as indifference, denial or dissociation, this is not the kind of detachment I am recommending. I am referring to the philosophical definition, which is a mindfulness technique where we don’t attach our happiness to expectations, outcomes, other people, possessions or money. Detachment can help you zoom out and see the bigger picture rather than being locked in on one way of doing things therefore avoiding anchoring bias.
All of us are smarter than just one of us. Soliciting a variety of perspectives can reduce anchoring bias and provide greater financial consciousness, financial awareness and financial empowerment.
Knowledge and awareness are key components to overcoming anchoring bias. But how do you know what’s influencing your financial decisions? Review these common Frequently Asked Questions (FAQs) to learn how you can create awareness around your anchor biases, increase your critical thinking skills and understand how your biases could be influencing your decisions.
When we subconsciously oversimplify something based on that first piece of information, we internalize it as true, and as a result, make arbitrary decisions not based on logic.
Quite simply, take the time to become aware of any anchoring biases you might have when making financial decisions. Start by determining what that first piece of information was and how it might be influencing your decision making.
When making any kind of purchasing decision, our past memories can influence what actions we take. It creates an arbitrary benchmark based on preconceived notions that can result in making decisions based on emotions, not facts.
You can experiment with the stock market by doing an imaginary $500 investment. Consider three stocks you'd like to invest in. Review the stock price history as you determine which stocks to buy. Make the imaginary investment and then watch the stocks for three months. During this time, choose to sell them or hold onto them.
As you do this, concentrate on your thought process. Are you buying or selling the stocks based solely on the highest price you saw in the stock history? By doing so, you are not considering all aspects of the stock like why that happened. As a result, it skews your judgment.
In this instance, you may be experiencing another type of effect called the disposition effect, meaning you hope the stock jumps back to its purchased value (the reference point) to avoid recognizing the loss. If there's no evidence for the stock to gain, you should sell and forget past prices. Say, for example, you might have bought a stock at $35 and you see it drop to $27, then it rises to $32. Since you know the stock was at $35 at one point, you may not want to start selling the stock until it gets above $35.
Sometimes people get attached to investments that have gone up relative to their peers. They focus on the most recent return of a particular investment versus the fundamentals of the investment. Using the "high benchmark" can lead someone to hold onto an investment for way too long. They make an emotional decision versus applying logic.
Financial planner Bill Laipple shared, "We met a prospective client in the late 1990s that invested his entire savings ($200 thousand) in one stock. That stock went up considerably in a short amount of time. When we met it was valued at over $5 million. We suggested that he sell and diversify. We asked him what he would do if we gave him $5 million that day. He said he would spread it out over multiple investments. But, he let his emotions drive his behavior, held on and rode that stock down to nothing."
Anchoring biases influence the way we spend our money from splurging on "treat yourself" days to choosing the right car insurance. Because of the way they affect our decisions, they can impact our mental health and the way we view our finances. Learn more on how our behaviors, emotions and cognitive biases can determine our spending habits.
About Joyce Marter
Joyce Marter is a licensed psychotherapist with 25 years of experience and entrepreneur who founded and successfully sold Urban Balance, a national outpatient mental health company in the U.S. Marter is an adjunct professor at Northwestern University, international speaker, blogger for Psychology Today and mental health thought-leader specializing in the psychology of money.
Joyce Marter is routinely consulted as a mental health expert in the media, featured in such outlets as U.S. News & World Report, The Wall Street Journal, CNN and MTV. Her book, The Financial Mindset Fix: A Mental Fitness Program for an Abundant Life, was published by Sounds True in July of 2021 and has been featured in Business Insider, MoneyGeek, US Weekly, Thrive Global, Forbes and more.
