Anchoring |
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One of many common, psychologically-based financial mistakes. It occurs when a person bases her decision on a fact or figure that should in reality have no bearing on that judgement or decision. Put simply, humans have a tendency to latch on to a certain easily-acceptable ideas, facts, or numbers, particularly when these ideas or numbers are reinforced by repetition and/or a source of authority. These ideas and numbers then become reference points for future decisions, regardless of whether the ideas were in fact remotely applicable to that future decision. For instance, an inexperienced home buyer visits a house for which the seller is asking $150,000. The buyer has done little research for that specific neighborhood, and so has little idea as to whether or not the asking price is a fair one. In all likelihood, the buyer will base his initial offer (and probably any follow-up offers) on the seller's asking price regardless of whether or not that asking price is a viable one for the given property in its given neighborhood. Thus the buyer is said to be "anchored" to the seller's price — and likely will never realize such. | |||