Anchoring

Anchoring is the effect of sugestions (such as given or imposed brackets) on decision making.

Kahneman and Tversky's (1974) experiment, subjects were given simple questions with answers in percentages e.g. The number of African nations are represented in the United Nations. A wheel of fortune with numbers 1 to 100 was spun and then the subjects were asked if their answer was higher or lower than the number on which the wheel had stopped. Subjects were then asked togive their answer. Needless to say, the wheel had nothing to do with the correct answer. However, it was found that the median estimates of the percentage of African countries in the United Nations were 25 and 45 for groups that received 10 and 65 respectively, as starting points. (Shiller, 1997)

These results can also be applied to the uncertainty of Stock Averages such as the Dow Jones Industrial Average. Also when the 1980s Japanese stock prices were thought to be amazingly high (probably "influenced by the readily available U.S. price-earnings ratio" (Shiller, 1997)).

Fisher also posited that anchoring may also be the cause of people's inadequate allowances for inflation and confusion between real and nominal quantities.