Anchoring and (Insufficient) Adjustment

Heuristic and Biases

A psychological approach that deals with how people make judgments and decisions based on mental shortcuts.

Anchoring

A cognitive bias that describes the common human tendency to rely too heavily on the first piece of information encountered when making decisions.

Money Pump

A situation where a decision maker keeps switching between options based on changing valuations, incurring losses each time.

Preference Reversal

A phenomenon where individuals switch their preference between options based on how choices are presented.

Expected Value (EV)

The anticipated value for a given investment or gamble, calculated as the sum of all possible outcomes, each multiplied by its probability.

Gamble A (Probabilities)

11/36 probability of winning $16 and 25/36 probability of losing $1.50.

Gamble B (Probabilities)

35/36 probability of winning $4 and 1/36 probability of losing $1.

Primacy Effect

The tendency to remember and give more weight to the first piece of information presented.

Slovic, Fischhoff, & Lichtenstein (1982) Study

A study exploring risk assessment in decision making, comparing real gamblers and students.

Tversky and Kahneman (1974) Study

A foundational study on heuristics and biases that proposes various cognitive biases affecting judgment.

Condition 1 (Tversky and Kahneman), UN Membership

In 1974, the estimate for African countries in the UN was 35%, which is less than 10% but more than 25%.

Anchoring Effect in Auctions

Bids in a classroom auction were influenced by the last two digits of participants' Social Security numbers.

Ariely, Loewenstein, & Prelec (2003) Study

This study found correlation between participants' final bids and the last digits of their SSN during auctions.

Markus (1986) Study

A longitudinal study investigating the stability of political attitudes over time, showing anchoring effects in recall.

Assessing Fair Market Value

Real estate agents' appraisals were influenced by the initial listing price provided to them in the evaluation process.

Limitations of Human Attention

Cognitive limitations can lead to insufficient adjustment during decision making, complicating the judgment process.