The anchoring bias refers to the human tendency to base our decisions on a particular reference point. This bias can affect everything from salary negotiations to consumer purchases
has led wealth management teams at several of Canada’s largest financial institutions and holds a doctorate in behavioural finance.Weekends are supposed to be relaxing. Health statistics suggest otherwise – traumatic injuries from crashes, falls and collisions are significantly more common on weekends than during the week. This weekend warrior syndrome is partly the result of health-conscious individuals trying to squeeze the recommended weekly exercise into Saturday and Sunday.
The anchoring bias refers to the human tendency to base our decisions on a particular reference point, or anchor. In the case of the weekend warrior, an anchor point can be a high school personal best. Research suggests that this anchoring bias can affect everything from salary negotiations to consumer purchases and judicial decisions. For example, one study asked subjects to think of the last two digits of their social security number.
In another study, a group of experienced trial lawyers were asked to make sentencing decisions in a hypothetical shoplifting case. After hearing the case, and before passing sentence, the subjects were asked to roll a pair of dice. The subjects who rolled lower made significantly lower sentence recommendations than the subjects who rolled higher. Thus, irrelevant, and arbitrary, anchors were found to significantly influence key decisions.
Investors are not immune to this anchoring. A study of Scandinavian investors found that not only amateur, but also professional, investors anchored long-term return expectations on their historical estimates or an initial starting value. Such estimates also tended to be overly optimistic. This finding can have real implications for investors in the coming years. The S&P 500 returned -19 per cent in 2022 but 29 per cent, 16 per cent and 27 per cent respectively between 2019 and 2021.
Moreover, a 2016 report by the McKinsey Global Institute titled “Diminishing Returns: Why Investors May Need to Lower Their Expectations” pointed out that a series of exceptional economic and business conditions generated significantly higher returns over the past 30 years than the long-term trend. These conditions included dramatic decreases in
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