Anchoring Bias: Time To Look Beyond First Impressions!

Anchoring Bias plays out very commonly in interviews where ‘first impressions’ matter the most.

‘First Impressions’ lead to a quick yet incomplete judgement with a long-lasting persistence. These ‘First Impressions’ are an outcome of ‘Anchoring Bias’.

The Anchoring Bias resonates amongst all of us, wherein, we magnify and overvalue the first bit of information (or first impression) that we receive. Then onwards, any additional information (or impression) on the same subject, is built around our initial anchor (the first bit of information / impression).

Why does this happen? Why do we lay exaggerated emphasis on this first bit of information?

Well, let me answer this question in a very streamlined manner. Humans despise uncertainty. It makes us feel vulnerable and hence we go to large extents to protect ourselves from it.

I like to think of Anchoring Bias as a protection mechanism that your mind activates when faced with uncertainty. By anchoring down your thoughts, you establish a framework on which new bits of information can be added, and the anchor duly adjusted.

Unfortunately, most of us are unable to adjust our initial ‘anchor’ to new inputs, which I feel, arises due to discomfort at abandoning our initial set of beliefs.

The human mind is too complex to really break these concepts down in a short paragraph, but I hope that you have got the gist.

Anchoring Bias has a common prevalence in the investing decisions we make. Generally, the first piece of information that we receive about a company acts as the anchor to ‘our’ set of beliefs. This information could be ‘tips’ from people you trust, online articles, news snippets, or even something as fickle as the recent stock price chart. These impressions can have dramatic long-lasting effects.

Let me try to explain the concept of ‘anchoring’ via an example. Consider the stock price chart below.

Solely based on this timeframe, you see a clear downtrend which tends to generate a negatively biased anchor. You are unlikely to buy considering the price movements that you’ve seen (Yes, there will be some value investors who will have the time of their life, but the majority will avoid buying).

Anchor Sentiment:  NEGATIVE

Now let me show you a much longer timeframe of the same chart. Based on this, would you have taken the plunge and bought the stock? I would bet that you’d be much more likely to buy due to the sustained positive price momentum.

Anchor Sentiment: POSITIVE

Note: The reverse could also play out!

What is the key takeaway here?

First Impressions / First pieces of information / First Perspectives drive the anchoring bias in us. Invariably, many of us are unable to adjust our anchors to the new information that we receive.

We tend to view this information through the positive or negative lens of the anchor, even though it should ideally be treated independently.

Not all the information we receive has equal importance, most of it tends to be noise! Here’s an article on how you can overcome the analysis paralysis that occurs due to excessive information!

How can we attempt to overcome Anchoring Bias?

There is nothing wrong in using anchoring as a protective shield, but always remember that threats can come from random directions, and as such, you must be able to maneuver your shield appropriately!

Anton Chekhov sagaciously sums up the fallacy of anchoring (first impressions) as,

‘We all have too many wheels, screws and valves to judge each other on first impressions or one or two pointers. I don’t understand you, you don’t understand me and we don’t understand ourselves’

Anton Chekhov (Russian Playwright)

If you enjoyed this article do share it with your friends and colleagues! Cheers!

%d bloggers like this: