anchoring
Anchoring and adjustment
The rule
The first number you see drags every later guess toward it. Like a shopkeeper's high first price pulling your offer up, the moves you make away from it are almost always too small.
Where it flips
But not every first number is a trap. A past price paired with its old profits and conditions can be a useful record. The mistake is letting the bare number set your guess. The fix is to question the belief behind it, not to throw away every reference point.
Tversky and Kahneman showed that once a number is in your head, your judgement clings to it. Even a number people knew was meaningless, like a spun wheel, still moved their later guesses. People do move away from that first number, but they stop too soon. So the final answer stays pulled toward the start. In markets these first numbers are everywhere: a buy price, a year's high, an IPO price, an old ratio. If you saw ₹600 first, you cannot easily judge ₹240 on its own. The ₹600 keeps tugging your guess up, and 'cheap' arrives before the facts do. The fix is to notice which number came first and ask what belief was hiding inside it, instead of nudging bit by bit from it.
A worked example
A reader is told a stock once hit ₹600, then asked what it is worth now at ₹240. The ₹600 anchors them and they guess 'about ₹400, so it's cheap', before checking that profit margins halved and debt rose. Shown the same ₹240 with no history, they land far lower. [illustrative]
How to spot it
- ·a stock called cheap mainly because it sits below an old high
- ·guesses that cluster oddly close to the first figure heard
- ·a buy price or IPO price used as the mark for 'fair value'
Daniel Kahneman & Amos Tversky · Judgment under Uncertainty: Heuristics and Biases (1974)