Economics Anchoring Questions
Anchoring refers to the cognitive bias where individuals rely heavily on the first piece of information they receive when making decisions. In the stock market, anchoring can affect decision making by causing investors to fixate on a specific price or value as a reference point. This reference point, often based on past prices or analyst recommendations, can influence investors' perceptions of the stock's value and lead to biased decision making. For example, if an investor anchors on a high price for a stock, they may be reluctant to sell it even if the current market conditions suggest it is overvalued. Similarly, if an investor anchors on a low price, they may be hesitant to buy the stock even if it is undervalued. Anchoring can prevent investors from accurately assessing the true value of a stock and can lead to suboptimal investment decisions.