What Is Anchoring Bias?
Anchoring bias is a systematic thinking error referred to as a cognitive bias in psychology. An anchoring bias happens when you rely too much on the first piece of information you learn about something when making decisions or predictions. This bias comes into play with your finances especially when making investments or purchases.
Before you can conquer an anchoring bias, you need to better understand how and where it shows up in your life.
Understanding Anchoring Bias and How to Avoid It
Just like your mood can impact your spending habits, so can anchoring bias. We make financial decisions based on anchoring bias without even realizing we are doing it. It happens in our subconscious minds and the result can lead to poor financial planning, unwelcomed debt and stress.
With anchoring bias, any new information about the investment or item you are considering goes back to that first point of reference.
4 Examples of Anchoring Bias
Our subconscious mind plays a larger role in our decision-making than we realize. Here are four examples of anchoring biases.
Comparing prices of similar items when shopping around
If you see a sweater you’d like and then note the high $100 price tag and decide not to purchase it, that action goes into your memory bank. As you browse other sweaters, you may end up buying a $50 sweater simply because it’s half the price of the $100 sweater even though it’s not what you really wanted.
Making decisions based on a specific criterion
Imagine you are shopping around for a new insurance company. As you’re searching online, you come across a brand you recall seeing its commercials and slogans. For example, you might have heard, “our claims are the best!” That slogan is anchored in your memory, and you are likely to perceive it to be true when it could be false. To avoid this, compare quotes from multiple car insurance companies and assess the information you’ve compiled to find the best option for your needs.
Leading with preconceived notions and emotions
When it comes to investing, financial planners often see clients who base their financial future based on emotions rather than investment fundamentals. One way to avoid making preconceived and emotional financial decisions is to become aware of your anchoring biases. Learn what information influences your decision making, such as past memories, family and friend impressions or strong advertising exposure. Being financially self-aware can help decrease emotional financial decisions and lead to making more fact-based choices.
Choosing a benchmark during negotiations
During salary negotiation, you can use anchoring bias to your advantage. When interviewing for the job, state your “high benchmark” salary. That way, if they do make you an offer, the hiring team will know what salary you want and may consider that during salary negotiations.
4 Strategies to Avoid Anchoring Biases
There are four key strategies you can use to avoid anchoring bias and create more "mental wealth and financial stability" in your life today.
Have an abundant mindset
I ascribe to the theory of abundance; there is more than enough money, opportunity, goodness, love and other resources for all of us. Therefore, when we have more, it doesn’t mean somebody else has less. Abundant thinking can create new income streams and increased revenue for you while providing more for others,such as jobs, internships, sliding fee or pro bono services and charity. Abundance isn’t selfish; when you have more, you can help more. A friend who had breast cancer had one doctor give her treatment options. Because she had an abundant mindset, she asked five more doctors before choosing the right regimen for her.
The opposite of an abundant mindset is a scarcity mindset. Having a scarcity mindset might exacerbate your tendency to have an anchoring bias because you are only looking at the one option you know rather than an abundance of options and choices. Shifting from a scarcity mindset to an abundance mindset opens doors to possibilities, collaborations, celebrating the successes of others and greater prosperity.
Stay in the present
Being present can make you more financially conscious and mindful. By doing so, you begin to notice your thoughts and feelings and become aware of what you might be denying or not seeing because of anchoring bias.
When you apply mindfulness to your financial life, you can make decisions from a place of peace, groundedness and clarity. Reconnect with the fire inside your heart when facing important choices and decisions through quiet reflection, meditation, mindfulness and presence. Let your inner light be your guide.
The dictionary defines detachment as being aloof, distant or uncaring. While some think of detachment as indifference, denial or dissociation, this is not the kind of detachment I am recommending. I am referring to the philosophical definition, which is a mindfulness technique where we don’t attach our happiness to expectations, outcomes, other people, possessions or money. Detachment can help you zoom out and see the bigger picture rather than being locked in on one way of doing things therefore avoiding anchoring bias.
All of us are smarter than just one of us. Soliciting a variety of perspectives can reduce anchoring bias and provide greater financial consciousness, financial awareness and financial empowerment.
Anchoring Bias FAQs
Knowledge and awareness are key components to overcoming anchoring bias. But how do you know what’s influencing your financial decisions? Review these common Frequently Asked Questions (FAQs) to learn how you can create awareness around your anchor biases, increase your critical thinking skills and understand how your biases could be influencing your decisions.
MoneyGeek spoke with psychology and finance industry leaders to learn what their expert insight is on anchoring bias. The following two experts weigh in on various aspects of this cognitive bias as it relates to decision making and financial impact.
- How does an anchoring bias work?
- How can we compensate for an anchoring bias?
- As a financial planner, what is one of the biggest dangers of anchoring bias when making a financial plan?
- What can you do to achieve long-term financial success?
- How do you help your clients work around anchoring bias and why is that important for financial planning?
Licensed Clinical Neuro-Rehabilitation Psychologist and Director of the Chicago Center for Cognitive Wellness
Certified Financial Planner & Wealth Manager at Stonebridge Wealth Management.
Anchoring biases influence the way we spend our money from splurging on "treat yourself" days to choosing the right car insurance. Because of the way they affect our decisions, they can impact our mental health and the way we view our finances. Learn more on how our behaviors, emotions and cognitive biases can determine our spending habits.
- The Psychology of "Treat Yourself": How to Manage the Urge to Splurge: Some people treat themselves as a way to boost their mood and can fall into several anchoring biases as they look for popular items. Before you start your next "treat yourself" day, find out the best ways to treat yourself and manage your splurges accordingly.
- 6 Reasons That Are Influencing the Way You Buy Car Insurance: As you're looking for the right car insurance for your situation, your potential preconceived notions and anchoring biases may impact your decision. Here are several psychological biases to look out for when you're shopping around for car insurance and comparing quotes.
- How to Overcome Past Financial Trauma and Increase Your Wealth: Your past financial trauma could be anchoring you from increasing your wealth. Learn how you can accept your financial past, understand ways you might be financially self-sabotaging yourself and find ways to start building your wealth.
- How Debt and Financial Stress Affects Your Mental Health and Ways to Cope: As we continue to encounter cognitive biases in our everyday lives, our spending habits may become unhealthy, and we may find ourselves in debt. Learn how debt and financial stress can impact your mental health and what you can do to cope.
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