finance concept- use of tools for analysis

May 28th, 2015
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Abilene Christian University
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What Does Anchoring Mean? The use of irrelevant information as a reference for evaluating or estimating some unknown value or information. When anchoring, people base decisions or estimates on events or values known to them, even though these facts may have no bearing on the actual event or value.

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Introduction:there are many instances where emotion and psychology influence our decisions, causing us to behave in unpredictable or irrational ways.......AnchoringWhat Does Anchoring Mean?The use of irrelevant information as a referencefor evaluating or estimating some unknown value or information.When anchoring, people base decisions or estimates on events or values known to them, even thoughthese factsmay have no bearing onthe actual event or value. Application:Here's an everyday example:a friend askshow much youpay in rent for your 800-square-foot apartment, and thenasks how much a 1,100-sq-ft apartment would cost to rent in the same building. Would youmake an estimate by addinga little moreto what you pay evenif you've no idea of the actual costs?If so, you would beanchoringyour estimate onto whatyou pay foryour apartment.In the context of investing,investors will tend to hang on to losing investments by waitingfor the investmentto break-evenat the price at which it was purchased. Thus,they anchor the value of their investment to the value it once had, and instead of selling it to realize the loss, they take on greater risk by holding it in the hopesit will go back up to its purchase price. Investment AnchoringAnchoring can also be a source of frustration in the financial world, as investors base their decisions on irrelevant figures and statistics. For example, some investors invest in the stocks of compan

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