Anchoring

Present your brain with a number and ask to make an estimate of something completely irrelevant. For instance: write three last digits of your phone number and name the date Taj Mahal was built. Our brain anchor its estimate on that first number.

 

Negotiations

 

In negotiations, naming a high sell price for a business can help to secure an attractive outcome for  the seller. Most likely, the buyer’s offer will be anchored around that figure.

 

Advertising

 

This is also present in advertising world. Most retail-fund managers advertise their funds on the basis of past experience. However, research show there is no correlation between past  and future performance. When citing past performance, managers anchor the notion of future top-quartile performance in the customer minds.

 

Investments

 

Most investors trade stocks too frequently shifting mutual funds based on most recent advice of too many experts. Most people think too little about the type of assists they want in investment portfolios. They place too little of their long term investments in stocks.

 

Individuals use naive strategies for asset allocation, sticking what they and others have decide in the past. Investment decisions are fairly mindless. People place naive allocation and does not adjust their decisions, even if life circumstances change over time.

 

Usually, human beings choose investments allocating 50:50. Rather than being led naively by choices of their employees, investors should think carefully about their allocations.

 

Recommendations

 

Anchoring could be avoided when taking a long-term perspective. Put this in the context of the past 20 or 30 years and observe what are the actual trends.

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