Definition
Anchoring Effect is a cognitive bias where individuals rely heavily on an initial reference point or "anchor" when making decisions or estimates, even if that anchor is irrelevant.
Why It Matters
Anchoring affects economic and financial decisions by skewing judgment. Consumers, investors, and negotiators often make choices influenced by initial numbers or suggested values, which can lead to systematic overestimation or underestimation in pricing, forecasting, or negotiations.
Example
If a product is first displayed at $500 and later marked down to $350, buyers may perceive $350 as a bargain relative to the initial $500, even if the intrinsic value is $300. In finance, analysts’ forecasts can be biased by prior estimates or past performance anchors.