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The Anchoring Bias and Your Clients

Joseph E. Maccone

Managing Director | Head of U.S. Intermediary Distribution


Anchoring is the well-documented tendency we have to latch on to the first number we come across in the process of making a decision and use it as the reference point for all subsequent thoughts on the topic, giving that number a disproportionate influence over our decision making.Surprisingly, we are usually unaware of just how swayed we are by that first number.

The Problem of Anchoring

The anchors we subconsciously choose are frequently arbitrary, having little or nothing to do with the decision at hand, yet having a substantial impact on the conclusions we draw. In one experiment, participants were asked to write down the last three digits of their phone number, multiplied by 1,000. They were then asked to estimate the values of homes. As it turned out, the simple act of writing part of their phone number was enough to anchor participants, significantly influencing the values they assigned to home prices.2

The tendency to anchor affects everyone, from Wall Street analysts to Main Street investors. It can involve almost anything, from stocks to T-shirts. Anchoring can also happen anywhere in the evaluation process, affecting, for example, everything from the pricing of raw materials to the valuation of an entire company.

If we are unaware of it, we can be easily manipulated by the anchors that are thrown in our path. For example, in negotiations of any kind, whoever states the first number anchors the entire negotiation to that reference point, putting them in a position of power. To get a sense of just how often we succumb to anchoring, consider these everyday examples:

Financial Decisions Are Especially Prone to Anchoring

Research shows that the more difficult a concept is to understand, the more we tend to rely on anchors.For most of your clients, decisions around when to buy and sell securities, how to adequately diversify a portfolio, and how much to save for retirement involve a level of sophistication that requires some learning on their part. The challenge of a learning curve can make a client more likely to cling to the subconscious anchors they already have in place.

As an advisor, you’ve probably come across clients who seem stuck. They resist following your advice for reasons that are not clear to you, or possibly even to them. This may be because the client is tied to an anchor that neither of you sees. Have you ever had a client who was unwilling to sell a losing stock because they were waiting for it to get back to its purchase price? The purchase price may have little to do with the investment’s true value, yet has a disproportionate effect on the client’s desire to hold the position.

Why Anchoring Is Hard to Resist

One of the reasons the anchoring bias is so prevalent is that it serves as a survival strategy by freeing up time and brain space. Making assumptions about relationships makes decisions easier. Those assumptions save us time, enabling us to avoid the sizable amount of work it would take to form judgments that are truly unbiased. Without assumptions, we’d have to build an objective analysis of the topic in question from scratch every time. Given this alternative, anchoring may seem like an especially useful shortcut in a busy world.4

Helping Clients

When we are blinded by an irrelevant anchor, we fail to see the best path forward. To the extent you can help clients replace emotional biases with a well-thought-out plan, you’ll demonstrate your worth as their advisor. Here are some ways to start the discussion:

 
1.     Uncover their anchors.
 

Talk to your clients about anchoring and other biases that can threaten their financial plan. To uncover hidden anchors, try asking open-ended, probing questions like:

“You seem to have a strong opinion about [XYZ decision]. Can you help me understand where that’s coming from?”

“I think [course of action] makes sense for you, but I can tell you’re not sure. What are your concerns?”

“You seem hesitant about taking my advice on [XYZ decision]. Let’s talk about what’s behind that so I can better understand where you’re coming from.”

2.     Try to replace bad anchors with good ones. 

We are all prone to subconsciously using anchors as mental shortcuts in decision making. For financial decisions, a potentially better approach is to be proactive about choosing reference points that are relevant. Putting a “good” anchor in place means guiding a client with meaningful, objective data that are closely linked to the decision at hand.

For example, if you discover that your client is anchored to the high water mark of a losing investment, consider a deliberate shift to a price target based on a more accurate estimate of the company’s fundamental value. 

Conclusion

Anchoring is just one of several behavioral biases that can threaten your clients’ financial futures. In helping them see more clearly the flaws in their own decision making, you remove stumbling blocks that stand in the way of their success. That’s a great way to show how you add value as their financial coach, which is something a robo competitor can’t do. 


1 Tversky, Amos; Kahneman, Daniel. “Judgment under Uncertainty: Heuristics and Biases.” Science Magazine, Vol. 185, Issue 4157, pp. 1124–1131. Sept. 27, 1974.
2 Scott, Peter; Lizieri, Colin. “Consumer house price judgements: new evidence of anchoring and arbitrary coherence.” Journal of Property Research. January 20, 2012.
3 “Anchoring Bias: How the first data point we see impacts our decisions.” Corporate Finance Institute.
4 Foulke, David. “Behavioral Finance 101 for Wall Street: Social Anchoring.” Alpha Architect. April 11, 2014.

WRITTEN BY

Joseph E. Maccone

Managing Director | Head of U.S. Intermediary Distribution

PUBLISHED: November 22, 2019

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