Hence, even though there is no reason for the real estate sector to boom in the near future, investors may be biased because of its past performance. However, there are still a large number of investors who are anchored at past returns. For instance, in many parts of the world, real estate is under stress, and the prices have remained stagnant for some time. Anchoring bias causes investors to look at the past investment performance of a product and assume that it will continue to remain so in the future.They actually have no relation to the inherent, intrinsic value of a product. The main problem with anchors is that they are purely based on chance.Some of the possible flaws of the anchoring bias have been mentioned below: How Anchoring Bias Affects Financial DecisionsĪnchoring bias can be very dangerous and can cause an investor to make rash financial decisions. This is the reason that e-commerce portals all over the world will write a higher price, then show and discount before they finally mention the selling price. Companies all over the world use anchoring bias to sell more products. This is particularly important in financial markets wherein people have to view prices and make buy and sell decisions every day. We view all the subsequent information in the light of that anchor. The anchoring bias is based on the fact that the first or initial information about the price of a product creates an anchor in our minds. On the other hand, if the seller directly offered the product at a $50 price, then the seller might find the price to be expensive. This is because the discount makes the product appear cheaper and increases the value of the deal in the mind of the buyer. For example, if a person goes to a shopping mall and they see that the price of a particular product to be $100 and then after a 50% discount they have to pay $50, they may be more inclined to buy the product. What is Anchoring Bias?Īn anchoring bias is a mental flaw that impacts the way a person derives the price of anything. In this article, we will have a look at the anchoring bias and how it impacts decision making. The problem with anchoring bias is that it is difficult to determine when a persons decisions are based on facts and when the bias is taking over. It affects the thinking of even the most sophisticated investors in the market. However, they still might not be aware of or be able to manage some of the more advanced biases. The average investor may be able to keep their thinking in check and save themselves from a lot of biases.