Anchoring and pre-existing knowledge in economic and financial settings

Abstract

Contemporary research documents various psychological aspects of economic thought and decision-making. The main goal of our study is to analyze the role of the anchoring (bias) (Tversky and Kahneman, 1974) in perceiving economic and financial information, and, in particular, the effect of pre-existing knowledge on the degree of the bias. Anchoring bias refers to people's tendency to form their estimates for different categories, starting from a particular available, and often irrelevant, value and insufficiently adjusting their final judgments from this starting value. We carry out an experiment involving a group of MBA students, asking them to recall a number of recent economic and financial indicators (stock and bond market index returns, rates of inflation, currency exchange rates, etc.), with half of the participants receiving actual information about some unrelated indicators (anchors), before answering the questions. We document that significant anchoring bias is exhibited, on average, for each of our experimental questions and by vast majority of the participants, the degree of the bias being higher for women and older participants. Furthermore, in the context of the effect of pre-existing knowledge, we find that people exhibit significantly stronger bias for relatively more difficult questions. Our findings indicate that the less people know about an object or a category, the more they may be influenced by some, even arbitrary, anchors when estimating its characteristics or forecasting related future outcomes.