The Impact of Anchoring Bias on Financial Decision-Making: Exploring Cognitive Biases in Decision-Making Processes

Abstract

This article explores the concept of anchoring bias in financial decision-making. Anchoring bias refers to the tendency for individuals to rely too heavily on an initial anchor when making judgments or decisions, even if the anchor is arbitrary or irrelevant. The article defines anchoring bias, discusses its effects on investment decisions, pricing and valuation decisions, and risk assessment and management. Strategies for recognizing and reducing the impact of anchoring bias are explored, including awareness and reflection, seeking diverse perspectives, considering multiple anchors, utilizing decision-making tools, and encouraging independent thinking. The role of education and training in minimizing anchoring bias is discussed, as well as the importance of diversification and independent analysis in decision-making. By understanding and addressing anchoring bias, individuals can make more rational and unbiased financial decisions.