The Anchoring Effect and how it’s impacting investor decisions

Jun 24, 2021

the anchoring effect

When people first learn about behavioral economics, they are shocked at the myriad ways they are vulnerable to manipulation. Here’s another bias investors should know — it’s called “anchoring”. It is the effect of irrelevant information on beliefs and subsequent actions. Researchers consistently find that people’s willingness to pay for products can be heavily and easily influenced by simply asking them for the last two digits of their social security number. Anchoring applies across many contexts, yet few environments are more fertile for us to be manipulated, than cryptocurrency markets.

Research in US equities suggests judgments are formed by prominent blue-chip stocks. The blue-chip “anchor” in cryptocurrency markets is BTC, which recontextualizes beliefs about altcoin prices. As a thought experiment, imagine what the size of the cryptocurrency market would be if BTC always hovered around, say, US$100. Would Ether have shot up to thousands of dollars without this anchor?
BTC has reached unimaginable highs in the absence of fundamental and material justification. In contrast, Apple’s high returns are reinforced by accelerating high gross-margin sales and other fundamental factors, that substantiate its equity price appreciation. BTC lacks these material fundamentals and so people’s willingness to pay for it is disproportionately based on arbitrary and behavioral factors instead of guiding fundamentals.

Much like the decoy effect, anchoring pulls us in a particular direction that is generally not in our best interest. But, once you identify it, it becomes easy to detect and you can deflect its influence to make informed decisions. To avoid getting anchored, pay extra-close attention in situations where you don’t have a firm grasp on the core facts and notice what information is guiding you and in which direction — this way you won’t sink your ship by getting anchored in the wrong place.