Anchoring Bias
Anchoring bias is over-reliance on the first piece of information encountered (the "anchor") when making decisions, even when arbitrary or outdated.
Exam Tip
Anchoring = fixating on first/arbitrary information. Common anchors: purchase price, 52-week high. Solution: focus on current fundamentals.
What is Anchoring Bias?
Initial information disproportionately influences subsequent judgments.
Common Anchors
- Purchase price
- 52-week high
- Round numbers
- Analyst price targets
How to Overcome
- Focus on current fundamentals
- Use multiple valuation methods
- Challenge initial assumptions
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Confirmation Bias
Confirmation bias is the tendency to seek, interpret, and remember information that confirms pre-existing beliefs while ignoring contradictory evidence.
Loss Aversion
Loss aversion is a cognitive bias where the psychological pain of losing is approximately twice as powerful as the pleasure of gaining an equivalent amount.
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