🧵Why Charlie Munger suggests investors should be aware of Anchoring Bias.
Anchoring bias is a cognitive bias that occurs when individuals rely too heavily on the first piece of information they encounter, known as the "anchor," when making decisions. ⬇️
Anchoring bias is a cognitive bias that occurs when individuals rely too heavily on the first piece of information they encounter, known as the "anchor," when making decisions. ⬇️
1/ "Anchoring occurs when people make judgments that are influenced by irrelevant or initially presented information." - Kahneman and Tversky (1973)
2/ This bias can lead to overvaluing or undervaluing an asset, as the initial anchor point becomes a reference point for future decision making.
3/ For example, if an individual is presented with a list of prices for a product and the first price they see is significantly higher than the others, they may anchor to that high price and perceive the other prices as being lower in value.
4/ "Anchoring is a phenomenon whereby initial impressions or views on a subject persist, despite subsequent evidence to the contrary." - Alexander and Goette (2006)
5/ Anchoring bias can also affect negotiations, as individuals may anchor to their initial offer or counteroffer and be unwilling to deviate from it.
6/ "Anchoring and adjustment is the psychological mechanism underlying the stark asymmetry between the ease of imagining alternatives and the difficulty of ignoring the initial reference point." - Slovic, Griffin, and Tversky (1990)
7/ To combat anchoring bias, it is important to consider a range of information and to be open to adjusting one's initial views.
"The idea that intelligence consists of the ability to learn from experience is clearly wrong." - Charlie Munger
"The idea that intelligence consists of the ability to learn from experience is clearly wrong." - Charlie Munger
8/ Munger has spoken extensively about anchoring bias in the last.
"The human mind is a lot like the human egg, and the human egg has a shut-off device. When sperm gets in, it shuts off so that no other sperm can get in. And the human mind has a shut-off device too…
"The human mind is a lot like the human egg, and the human egg has a shut-off device. When sperm gets in, it shuts off so that no other sperm can get in. And the human mind has a shut-off device too…
9/ …”When you get some new fact, it tends to shut off your receptivity to new facts that contradict that fact." - Charlie Munger
In order to avoid the pitfalls of anchoring bias, Munger advises regularly exposing oneself to new information & considering alternative viewpoints.
In order to avoid the pitfalls of anchoring bias, Munger advises regularly exposing oneself to new information & considering alternative viewpoints.
10/ "The best way to get the right answer on the internet is not to ask a question, it's to post the wrong answer." - Charlie Munger
By actively seeking out and challenging one's own biases, individuals can improve their decision-making abilities and achieve better outcomes.
By actively seeking out and challenging one's own biases, individuals can improve their decision-making abilities and achieve better outcomes.
11/ "The most important thing to do if you find yourself in a hole is to stop digging." - Charlie Munger
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