Abu Zafar Md Shaleh, 1802834

Behavioral Economics/A9481/Setälä

Laurea University of Applied Sciences 05.03.2019

Misbehaving
Abu Zafar Md Shaleh, 1802834
Error! No text of specified style in document./Error!
No text of specified style in document./Error! No
Laurea University of Applied Sciences 05.03.2019

Table of Contents

1 Introduction 3
2 Consequence in decision making 3
3 Real life example 4
4 Causes and influences 5
Abu Zafar Md Shaleh, 1802834
Error! No text of specified style in document./Error!
No text of specified style in document. /Error! No
Laurea University of Applied Sciences 05.03.2019

1 Introduction

The aim of this report is to analyse and understand anchoring bias and to discuss
how it effects on our daily and business decision-making processes. In this report,
we will depict all the knowledge that has been acquired from the lectures about
biases. In this report we are going to talk about:

 The definition and origination of anchoring biases

 How it effects anchoring bias effect our decision-making process

 How does it happen and how it influences?

 How to avoid and how to utilize this into business.

According to Kahneman (2011), anchoring bias results from cognitive bias, where
cognitive bias is “intuitive preferences that consistently violates the rules of
rational choice”. In this report we are not going to talk about cognitive bias, but we
will emphasise on anchoring bias. Anchoring bias is ‘any number that you are asked
to consider as a possible solution to an estimation problem will induce an anchoring
effect’ (Kahneman, 2011). In another way, it can be said that people make their
decision on the basis of their first impressions to form their perceptions (Kumar, S.,
2018). For instance, during the time Jeans pant shopping, if we see a jeans pant
cost 40 euro on the other hand another pant cost same after 30% discount so we
will buy more this rather than without discount pant. Anchoring bias generate from
two systems: system 1 where it is caused by priming effect and it comes out
automatically and system 2 where it comes out from the conscious activity of
adjustment. People think that is unbelievable because most of the time it happens
without having own experience (Kahneman, 2011). Here, we are going to give short
description of biases that are related with anchoring. Priming bias is not just
restraining your word but also your concepts, however, your emotions can fulfil the
event automatically. This is system 1 where it performs automatically. For
example, SO_P this word easily can be filled out by SOUP or SOAP, if you have
experience while eating or washing (Kahneman, 2011). Another bias is framing
where it occurs when the exact information is demonstrated in a different way and
it generates different emotions (Kahneman, 2011). For instance, this soft drink
contains 5 % sugar or 95 % sugar free. Availability heuristic occurs when a person is
scrutinizing a situation, topic or event from person’s recent example that come to
mind (Availability heuristic, 2019). According to Heshmat, S. (2015) confirmation
bias is created from one’s believe, where one likes certain idea then one start
believing on that. Group thinking bias is created on the members of group where
they would take inappropriate decisions rather than rocking the boat (Jones &
Roelofsma, 2000).

2 Consequence in decision making

In our daily life we make decision whether we intent to buy salt or invest in
business. During the decision-making process anchoring put their impact in two on
the quality of decision. Firstly, people do not process or understand all the new
information. It could be said in another way that you will not understand everything
what you have seen or hear because your brain has locked a piece of information
that will restrain to understand other information. Secondly, when your brain locks
some information that is correct then it is way harder to change and to add new
information. This is basically to change someone’s believe or opinion. If the locked
information is incorrect then brain will initiate to do that as a result person will
make a wrong decision (Gasaway, R., 2017).
Abu Zafar Md Shaleh, 1802834
Error! No text of specified style in document./Error!
No text of specified style in document. /Error! No
Laurea University of Applied Sciences 05.03.2019

In the business world, meeting and discussion is one of the important tasks to reach
into a decision. During the meeting, there are some type of people who put their
disagreement view point rather than exploiting the future opportunity and they are
much more curious about dissenting views and often leaders think that subordinate
is going to agree on the agenda, or they start scrutinizing the analysis of the
meeting (Kahneman & Klein, 2010).

In the hierarchic organizations, employees are not supposed to debate or disagree

in the meeting, there employees inclined to agree, and they do not express their
viewpoint and wait for the seniors’ view. Here group thinking bias occur (Roxburgh,
2009). In the group members are prompt to make harmonious decision rather than
making feasible and realistic decision this happens due to the strong pressure from
subordinates, seniors as a result they just follow the orders (Jones & Roelofsma,
2000).

During the strategic decision making, availability bias occur when presenter present
specific information (numbers, facts) for decision making as a result other attendee
will not seek for additional information. There information is presented in a way
that people make their decision based on that (Kahneman, 2011).

We are making decisions on our daily and business life which is an important part
our life because one wrong decision can ruin everything, so we need to be very
careful while making.

3 Real life example

In our daily and business life we are confronting anchoring bias, let’s have a look on
some of the examples:

The following examples are for day to day activity:

One of the best examples of anchoring effect is black Friday where stores bring you
to their store by giving so much discount advertising. Customer receive the
information that is little more than anchoring. Discount ads shows that new product
cost this after a big discount while customer buying product, they perceive the
original value of the product. While we are buying grocery stuff, we see most of the
products price ending with 9. Anchoring bias 9 is the powerful number to attract
customer. Salmon filet cost 29 Euro not 30 Euro. Customer perceive that it is not
1Euro cheaper it is 10Euro cheaper (McElhany, R., 2016).

Anchoring effect influence us more than money. For instance, if your parent age is
still alive and their age is 82 and 86 then you automatically start thinking that you
will also live like them. You have ignored some other information that your parents
lead a health life, their lifestyle was active, and they eat more organic food and
never take junk food while you have bad life style, eat a lot of junk food and
alcohol. If you have a kid, how much would you allow tour kid to watch TV? The
answer beneath your childhood habit, if you had watched TV more than 3hours, you
will allow your kid to watch more than 3 hours or vice-versa (Cherry, K., 2019).

Now let’s see some example related to job and investment. During the increment
period it is natural that you will feel shy to ask to raise your salary to your boss.
The best thing is to make initial offer first so that your negotiation will be around
that figure. So, the wise decision is to ask for big amount so that in return you will
get close to higher money (Cherry, K., 2019).

While you are planning to invest into Appel’s stock then you would think about
return after 3 months. You will predict the value after 3 months by asking the value
Abu Zafar Md Shaleh, 1802834
Error! No text of specified style in document./Error!
No text of specified style in document. /Error! No
Laurea University of Applied Sciences 05.03.2019

of today. Here anchoring is formed, perceiving future value based on today’s value.
For currency valuation, anchoring is active, but dangerous. It is hard to know the
intrinsic value of the currency at that time anchoring effect occurs. The anchoring
value do not represent the value of intrinsic value, so we have a tendency to follow
the anchor value rather than intrinsic value (Anchoring Bias - Definition, Overview
and Examples).

These are the examples that suit to our life.

4 Causes and influences

There are three causes of getting anchoring bias, they are as follows:

Anchoring-and-adjustment: This is occurred in two stages, in the first stage people

collect initial judgement that is call anchor and in the second stage, they try to
cope up with judgement with other information and it is adjusted in an insufficient
way. Another way it could be said that anchoring occurs due to the insufficient
adjustment process which has been processed by brain through the presented value
(Tversky and Kahnema,1974). For example, for selling a house, seller can set a
higher value so that buyer will offer a price near to the higher value, on the other
hand seller can set a lower price for bidding and want a higher price from bidding
war. In these scenario anchor is the value which try to make decision by
adjusting(Amie, 2012).
Selective accessibility: this is a process where there is an anchor and a judge (a
person making judgment), so judge will examine a hypothesis that anchor assume
that is a correct answer. Let’s say the answer was wrong so judge will look for
another answer without knowing the related attributes of anchor. While making
new answer judge look for results which is similar to anchor at that time anchoring
effect happen (Mussweiler, & Strack, 1999).
Attitude change: According to Furnham and Boo (2011) ‘Anchors could serve
directly as a cue or indirectly influence the information processing that bias
judgments toward the anchors’.
 //

Laurea University of Applied Sciences

References

Printed sources

Kahneman, D. (2011) Thinking Fast and Slow. New York: Farrar, Straus and Giroux.

Electronic sources

Amie. (2012, March 12). Why we sometimes make bad decisions: The anchoring and
adjustment heuristic. Retrieved from
http://psych-your-mind.blogspot.com/2012/03/why-we-sometimes-make-bad-
decisions.html

Anchoring Bias - Definition, Overview and Examples. Retrieved from

https://corporatefinanceinstitute.com/resources/knowledge/trading-investing/
anchoring-bias/

Availability heuristic. (2019, February 16). Retrieved from

https://en.wikipedia.org/wiki/Availability_heuristic

Cherry, K. (2019, January 10). How Your Decisions Are Biased by the First Thing You
Hear. Retrieved from https://www.verywellmind.com/what-is-the-anchoring-bias-
2795029

Furnham, A. and Boo, H. C. (2011). A literature review of the anchoring effect.

Journal of Socio-Economics, 40(1),35-42.
http://dx.doi.org/10.1016/j.socec.2010.10.008

Gasaway, R. (2017, July 21). Is Anchoring a Barrier to our Situational Awareness?

What does this mean? Retrieved from https://www.samatters.com/anchoring-bias-
barrier-situational-awareness/

Heshmat, S. (2015, April 13). What Is Confirmation Bias? Retrieved from

https://www.psychologytoday.com/us/blog/science-choice/201504/what-is-
confirmation-bias

Jones, P. E., & Roelofsma, P. H. (2000). The potential for social contextual and
group biases in team decision-making: Biases, conditions and psychological
mechanisms. Ergonomics,43(8), 1129-1152. doi:10.1080/00140130050084914

Kahneman, D., & Klein, G. (2010, March). Strategic decisions: When can you trust
your gut? Retrieved from https://www.mckinsey.com/business-functions/strategy-
and-corporate-finance/our-insights/strategic-decisions-when-can-you-trust-your-gut

Kumar, S. (2018, August 10). Anchoring Bias And Their Effects On Investment
Decisions Series - Part 10. Retrieved from
https://www.valuewalk.com/2018/08/behavioral-anchoring-bias/

McElhany, R. (2016, May 23). The Effects of Anchoring Bias on Human Behavior.
Retrieved from https://www.sagu.edu/thoughthub/the-affects-of-anchoring-bias-
on-human-behavior

Mussweiler, T., & Strack, F. (1999). Hypothesis-Consistent Testing and Semantic

Priming in the Anchoring Paradigm: A Selective Accessibility Model. Journal of
Experimental Social Psychology,35(2), 136-164. doi:10.1006/jesp.1998.1364
Abu Zafar Md Shaleh, 1802834 7 (10)
Error! No text of specified style in document./Error!
No text of specified style in document./Error! No
Laurea University of Applied Sciences 05.03.2019

Roxburgh, C. (2009, November). The use and abuse of scenarios. Retrieved from
https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/
our-insights/the-use-and-abuse-of-scenarios

Tversky, A., & Kahneman, D. (n.d.). Judgment under uncertainty: Heuristics and
biases. Judgment under Uncertainty,3-20. doi:10.1017/cbo9780511809477.002
Abu Zafar Md Shaleh, 1802834 8 (10)
Error! No text of specified style in document./Error!
No text of specified style in document./Error! No
Laurea University of Applied Sciences 05.03.2019

Figures

Figure 1: First figure 3

Figure 2: Second figure 3

Tables

Table 1: First table 3

Table 2: Second table 3

Abu Zafar Md Shaleh, 1802834 9 (10)
Error! No text of specified style in document./Error!
No text of specified style in document./Error! No
Laurea University of Applied Sciences 05.03.2019

Appendices

Appendix 1: First appendix 7

Appendix 2: Second appendix 8
Appendix 3: Third appendix 9
Abu Zafar Md Shaleh, 1802834 10 (10)
Error! No text of specified style in document./Error!
No text of specified style in document./Error! No
Laurea University of Applied Sciences 05.03.2019

Appendix 1: First appendix