Mental Model: Anchoring bias

“In many situations, people make estimates by starting from an initial value that is adjusted to yield the final answer. The initial value, or starting point, may be suggested by the formulation of the problem, or it may be the result of a partial computation. In either case, adjustments are typically insufficient (Slovic & Lichtenstein, 1971). That is, different starting points yield different estimates, which are biased toward the initial values. We call this phenomenon anchoring.” – Tversky and Kahneman (1974)

Since there is a lot of great articles already written on the subject, I will refer to one of these. For a great summary of the mental model anchoring, head over to the superb blog Farnam Street and the post Mental Model: Anchoring for further reading.

Remember, never look at the stock price before you have done your own analysis and come up with an estimate of a conservative intrinsic value per share.

Go to the page Mental Models for a listing of all mental models.

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