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Illusion of Relevance: Anchoring in Economic and Financial Knowledge

Author(s): Gil Cohen | Andrey Kudryavtse

Journal: International Journal of Economics and Research
ISSN 2229-6158

Volume: I;
Issue: 1;
Start page: 86;
Date: 2010;
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Keywords: Anchoring | Behavioral Economics and Finance | Experimental Economics and Finance | Information and Knowledg

Contemporary research documents various psychological aspects of economic thought and decision-making. The main goal of our study is to analyze the role of the anchoring (bias)(Tversky and Kahneman, 1974) in perceiving economic and financial information, and, in particular, the effect of perceived relevance of the anchors on the degree of the bias. Anchoring bias refers to people's tendency to form their estimates for different categories, starting from a particular available, and often irrelevant, value and insufficiently adjusting their final judgments from this starting value. We carry out an experiment involving a group of MBA students, asking them to recall a number of recent economic and financial indicators (stock and bond market index returns, rates of inflation, currency exchange rates, etc.), with half of the participants receiving actual information about some unrelated indicators (anchors), before answering the questions. We document that significant anchoring bias is exhibited, on average, for each of our experimental questions and by vast majority of the participants, the degree of the bias being higher for women and older participants. Furthermore, in the context of the effect of anchors' perceived relevance, we find that people exhibit significantly stronger bias in cases when the anchor is presented as a similar category. Our findings indicate that if, at least at the first glance, an anchor bears some similarity to the target question, then the resulting answer may be more assimilated towards the anchor
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