STUDY ON INVESTOR'S DECISION MAKING BASED ON ANCHORING BIAS

Abstract

Anchoring bias is a term that is used for the tendency of individuals to rely very heavily on first piece of information that they receive (the "anchor") while making decisions. This bias can impact investor decision-making in a number of ways. Investor receives information about a stock that is overvalued, they may use that information as an anchor and continue to believe that the stock is overvalued, even if subsequent information suggests otherwise. As a result, they may be less likely to buy the stock, even if it is undervalued, because their initial impression of it has been skewed. Anchoring bias also influences investor's ability of evaluating the potential returns of a stock accurately. If an investor is presented an initial estimate of the potential return of a stock, they may use that estimate as an anchor and fail to consider other relevant information that could impact the stock's return. This can lead to over- or under estimation of the stock's potential return, and could impact investment decisions accordingly. Another way that anchoring bias can impact investor decision-making is by leading investors to overweigh the short-term information and ignore long-term information. If an investor receives information about a stock that has performed well in the short term, they may use that information as an anchor and ignore information about the company's long-term prospects. Because it makes investors depend too strongly on the first piece of information they get, ignore subsequent information, and sometimes overestimate or underestimate the probable return on a stock, Anchoring bias influences investor decisions significantly. Investors should be aware of this tendency and make every effort to gather and consider all relevant information.