“EFFECT OF

ANCHORING BIAS IN
INDIVIDUAL
INVESTMENT MAKING”
BRM Project
Executive Summary

The independent variables like the income factor and profession tend to explain the
investment behavior of consumers through the tests conducted. So according to the test
results we reject our null hypothesis as there exists significant association between the
independent and the dependent variables.
Also, a substantial recognition is that industry experts turn out to be most influential factor in
investment behavior either in stock or mutual funds. The results are extracted from the
limited sample size so accuracy may not be very high. Also the questionnaire had some flaws
which made respondents fill random responses in some questions which had to be taken care
of. We have used Chi-square test to find the association is significant or not and hence we
conclude that our alternate hypothesis is accepted that investment behavior is affected
significantly by demographic and behavioral factors. 

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 Content
Pg. Topic Page No.
No

1 Introduction 3

2 Literature Review 4

3 Methodology of research 6

4 Research Question and Hypothesis 7

5 Findings and Limitations 12

Appendix

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 1. Introduction

Objective
The objective is to find out whether the investment decision of an individual is affected by anchoring
biases.
What is Anchoring bias?
Anchoring is a systematic pattern where an individual depends too heavily on a singular piece of
information provided when making decisions. Anchoring also describes how people consistently fail
to adjust appropriately to new information because they are "anchored" to an initial reference point,
taking the concept one step further. Exploring how this behaviour plays out in daily life and making
investment decisions will help us understand better what it is and avoid some of its unpleasant
consequences. Investigating how this conduct happens in regular day to day existence and when
settling on speculation choices will enable us to all the more likely comprehend what it is just as
dodge a portion of its disagreeable outcomes.
Anchoring bias can be seen in something as small as picking up a restaurant or a fuel or a cloth. For
example, for a person who pays Rs.78.5 for fuel will feel that they are overpaying when the fuel
prices increase to Rs.80, but for a person who has been paying Rs.85 for fuel will feel they are paying
less. It’s all about anchoring effect.

How anchoring bias effects finances?

Three instances of investment or finance related stays incorporate getting to be focused on price tag,
focusing on an irregular dimension in the market before contributing, and utilizing neighbourhood
lodging costs to measure the incentive on homes in different geologies. Quickly inspecting every one
of these precedents can enable financial specialists to defeat the inclination to be excessively impacted
by these grapples when settling on vital choices.
Despite the fact that a venture decreases in esteem, the anticipated forward profits for another open
door might be substantially more alluring than trusting that the first speculation will recover its
esteem. It is exceptionally troublesome for financial specialists to assume a misfortune and proceed
onward or utilize the deal continues to buy a progressively appealing speculation. This equivalent
powerful happens with effective ventures that are sold too soon on the grounds that a financial
specialist is likewise secured to her cost premise and battles to conform to a potential new reality. The
financial specialist may neglect to perceive how the venture can keep on giving alluring rates of return
notwithstanding when a positive expression point happens that changes the direction of the
speculation.
Another case of securing happens when financial specialists obtain a sizable sum of wealth, for
example, a legacy or closeout of a business, and lucid a craving to "hang tight for a rectification"
before contributing. This could allude to sitting tight for a 10% or 20% pullback in the securities
exchange or just be a round number they review from an earlier time, for example, the Dow Jones
Industrial Average tumbling to 20,000. The market may have as of late expanded, and there is a
propensity to grapple one's technique to a lower showcase level that, at present, appears to be a deal.
History uncovers this line of reasoning frequently results in problematic results as it is rash to
anticipate the market will definitely come back to past dimensions. The most recent quite a long while
of solid market execution, when many were doubtful of stock valuations, is an extraordinary case of
this. On the off chance that speculators are continually trusting that the ideal time will contribute, they
may pass up accepting profits on stocks or intrigue pay on bonds, a noteworthy segment of complete

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return. Speculators' long time skylines will in general significantly hose the impacts of awful
planning. At last, if people put resources into a fair, enhanced portfolio that shows substantially less
hazard than securities exchanges, they are considerably less legitimately presented to an adjustment
than they may accept.

2. Literature Review
The most common bias that affects decision-making is anchoring when studying investment behaviour.
Anchoring is defined as investors ' tendency to rely on certain information for decision-making. This study has
made an effort to systematically review the available literature on the existence and impact of biases in stock
market investments. The research work published in the past years was carried out for the purposes of the
analysis. Multiple articles were selected and analysed in terms of their year of publication, journal,
methodology, data used, and country of data collection, citation and content such as:

Analysis: Total 12 articles were selected and analysed in terms of their year of publication, Journal,
Methodology, Data used, citation and content.
Segments under which research papers are segmented:
Based on Biases in Investment Decisions:
1. Anchoring Effects on Consumers' Willingness-to-pay (WTP) and Willingness-to-accept
(WTA)
Year: 2003
Author: Itamar Simonson Aimee Drolet
Summary: In this research, the researchers contrast the determinants of WTP and WTA judgements
and investigate their vulnerability to influence by arbitrary anchors which are unrelated to the product
value. Results indicated that selling prices become sensitive to the arbitrary anchors if the uncertainty
about the value of the product is made important to the consumers.
2. How Much Does Expertise Reduce Behavioural Biases? The Case of Anchoring Effects
in Stock Return Estimates
Year: 2008
Author: Markku Kaustia, Eeva Alho, Vesa Puttonen
Summary: Find a very large anchoring effect in the students' long-term stock return expectations, that
is, their estimates are influenced by an initial starting value. Professionals show a much smaller
anchoring effect, but it nevertheless remains statistically and economically significant.

3. The Role of Anchoring Bias in the Equity Market

Year: 2010
Author: Ling Cen, Gilles Hilary and K.C. John Wei
Summary: How anchoring effect plays a role in the equity market. Evidence from Analysts’ Earnings
Forecasts and Stock Returns.
4. The literature review of anchoring effect
Year: 2010
Author: Adrian Furhman, Hua Chu Boo

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Summary: The anchoring effect is the most robust cognitive heuristics and paper reviews literature in
this area.
5. Anchoring Bias in Consensus Forecasts and its Effect on Market Prices
Year: 2012
Author: Sean D. Campbell and Steven A. Sharpe
Summary: We find broad based and significant evidence for the anchoring hypothesis; consensus
forecasts are biased towards the values of previous months’ data releases, which in some cases results
in sizable predictable forecast errors.
6. Anchoring: a valid explanation for biased forecasts when rational predictions are easily
accessible and well incentivized?
Year: 2013
Author: Lukas Meub, Till Proeger, Kilian Bizer
Summary: Introducing an experimental design that implements central aspects of forecasting to close
the gap between empirical studies on forecasting quality and the laboratory evidence for anchoring
effects.
7. Tough Negotiation Tips from Jennifer Aniston?
Year: 2015
Author: Alex Green
Summary: Learning about the salary negotiation and anchoring from the tv show FRIENDS.
8. Anchoring Effects in Real Litigation: An Empirical Study
Year: 2016
Author: Yum Chien Chang, Kong Pin Chen, Chang Chin Lin
Summary: This paper gives the evidence of anchoring effect in judicial decision-making. Taiwan's
court case on trespassing has been used to show the anchoring effect on court's judgement. Evidence
of anchoring effect and experience of judge are important determinants.
9. Anchoring bias in analysts’ EPS estimates
Year: 2016
Author: Sofia Kratz, Gustav Wenning
Summary: Bias in Analytics using the example of Swedish stock market.
10. Glamour, value and anchoring on the changing P/E
Year: 2017
Author: Keith Anderson, Tomasz Zastawniak
Summary: Inference that glamour investors anchor on the initially high P/E value, underestimate the
likelihood of change and are continually surprised.
11. Anchoring Effects in Decision making with Visual Analytics
Year: 2017
Author: Isaac Cho, Ryan Wesslen, Alireza Karduni, Sashank Santhanam, Samira Shaikh, Wenwen
Dou

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Summary: In this, authors investigate the effects of anchoring effect on human decision-making using
visual analytic systems. However, human decision-making is often hindered by the use of anchoring
effect. In this paper, they provide the evidence, through experiments, of anchoring effect in analysis
with visual analytics interface.
12. Anchoring Bias a Criterion for Explain Profitability of 52-Weeks High and Momentum
Strategies
Year: 2018
Author: Mohammad Hesham Jahanmiri, Fraydoon Rahnama Roodposhti, Hashem Nikoomaram
Summary: The aim of this study is to investigate the anchoring bias as a criterion to explain stock
returns by a behavioural approach at uncertainty situation for 52-high week strategy to the companies
listed on the Tehran Stock Exchange.

3. Methodology of research
SOURCES OF THE DATA:
Primary as well as Secondary data has been used for this study

• Primary Data: Primary data comprises the larger part of this study. The main source of data for
conducting this research is Primary data.
Surveys through E-Mail collected from our peers, relatives and acquaintances, are being used in this
study. Structured questionnaire have been sent out and floated in order to get the data for this
research.
• Secondary Data: Many research papers have also been in improving the knowledge regarding
anchoring biases. Important information have been extracted from various research papers and
journals published in this area.

SAMPLING DESIGN:

 The research has been carried out all over India.

 Sampling Population
o The population sufficing this research included all those undertaking or plan to
undertake investment in stocks and mutual funds.
 Sample Size
o The size of the sample for this study is 159
 Sampling Method
o CONVENIENCE SAMPLING technique has been used in this research.
 Research design
The team used ‘Descriptive Research Design’ to conduct this research.

 The tests used in this research are as follows:

T- Test and Chi - Square Test.

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4. RESEARCH QUESTION and Hypothesis

RESEARCH QUESTION
The research objective is to find out “If the anchoring biases effect the investment decision of an
individual?”

HYPOTHESIS
Null Hypothesis (Ho): Demographic and Behavioural factors of society and self, and financial
factors that of an economy do not affect investment decisions.
Alternative Hypothesis (Ha): Demographic and Behavioural factors of society and self, and
financial factors that of an economy does affect investment decisions.

VARIABLES:

DEPENDENT INDEPENDENT MEDIATING MODERATING

Risk Income Short Selling Motivation
Investment Decision Education Economic expectation Dividends
Information Behavioural Bias
Uncertainty
Task Complexity Financial efficiency FEPS
Gender Education Overconfidence
Market Sentiments Conservation
Dramatic News Media SELF
Payback period SOCIAL
Experience
Age
Stock Price
Forecasting
Expected Returns
Optimistic/Pessimistic
Forecast
Price Equity Ratio
Foreign Investment

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RELATIONSHIP AMONG THE VARIABLES:

Investment
Income
Decision

Investment
Education
Decision

Information
Risk
Uncertainty

visual Investment
analytics Decision

Task
Risk
Complexity

Payback Investment
Period Decision

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 Education Risk

Investment
Experience
Decision

Investment
Gender
Decision

Market Investment
Sentiments Decision

Dramatic
Risk
News Media

Price Equity Investment

Ratio Decision

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 Expected Investment
Returns Decision

Investment
Age
Decision

Foreign Investment
Investment Decision

Stock Price Short Selling Investment

Forecasting Decision

Financial
Efficiency,
Education,

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 Expected Economic Investment
Returns Expectations Decision

Dividends

Optimistic/ Investment
Pessimistic Decision
Forecast

FEPS (Forecasted
Earnings Per
Share), SELF

Task Complexity Investment

Motivation Decision

Overconfidence,
Conservation,
Behavioural Bias

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 5. Findings and Limitations
Findings:
1.Through the tests we find that the independent variable -        income is highly
significant in affecting the investment decisions taken. So these insights can be
utilized to study the investment behavior.
2· Profession is also significant in determining the investment behavior as there is
significant association.
3· According to Chi-Square test, Industry experts ended up being the most preferred
and reliable source for investment decisions in mutual funds. So, mutual fund
companies may attempt to close the deal utilizing industry experts.
4· The long length of the questionnaire might make people uninterested in filling it
.This problem can be addressed by removing some unnecessary questions and
combining some questions but keeping in mind not to form a double-barrelled
question. For instance, combining, “In making stock/ mutual funds investment
decisions, degree of reliance on: “
5·Combining this question won’t make a significant effect because the answers on
degree of reliance won’t differ be it investment in stocks or mutual fund.
 
 
LIMITATIONS/constraints
1. The sample size is not big enough to generate legitimate inferences from the tests
conducted.
2. The sampling area is not well characterized. Different patterns of consumer behavior
could not be recognized.
3. There is sampling bias in this research because Convenience sampling or Non
probabilistic sampling has been used.
4. Sample comprised of individuals from varying backgrounds and not every one of
them were very much educated about stock market and mutual funds as they hardly
invested in it.
5. Not all the factors influencing the investment decision are identified or recognized.
Only those few personal factors which are used in this research have been identified
and tested upon.
6. Most of the respondents did not fill the survey properly because of its length so results
might not be accurate.
7. The survey had a blemish in one of the questions where it asked “have you ever
invested in stocks or mutual funds? Here the options were incomplete as there was no
option for denial like if they had never invested in any one of them in their life.
Respondents had no option to leave the question.

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