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Anchoring Effect in Investment Decision Making-A Systematic Literature Review
Anchoring Effect in Investment Decision Making-A Systematic Literature Review
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Priya Kansal
Research Scholar, Department of Humanities,
Delhi Technological University.
ABSTRACT
While studying investment behavior, the most common bias which impact the decision making is anchoring.
Anchoring is defined as the tendency of investors to rely on some piece of information to take decision. The
present study made an effort to systematically review the literature available on the existence and effect of
anchoring bias in stock market investments. For the purpose of the analysis, the research work published in
last 15 years has been taken. Total 16 articles were selected on the basis of defined criteria and analyzed in
terms of their publication year, journal, methodology used, data used, country of data collection, citation and
content.
Keyword: Anchoring, systematic Literature review, Statistical Techniques, Citation Analysis, Content
Analysis
1. Introduction:
In behavioral economics research, the pioneer work to study anchoring effect is done by Tversky and
Kahneman (1974). According to Tversky and Kahneman, decision makers are generally influenced by an
initially presented value called anchor. And this influence is known as anchoring effect.
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Following the work of Tversky and Kahneman (1974), many studied discussed the anchoring effect in several
domains and lead to the existence of robust and substantial anchoring effects. For example, Sudgen et al.
(2013), Adaval and Wyer (2011), Bateman et al.(2008), Cricther and Gilovich (2008), Nunes and Boatwright
(2004), Simonson and Drolet (2004), Ariely et al. (2003) and Mussweiler et al.(2000) studied the anchoring
effect in price estimation and willingness to pay in different experimental settings for individuals of different
countries. Also in credit market, anchoring appears to be important as the firm anchor the past credit spread to
pay current credit spread.
Moreover, Liao et al (2013) studied the anchoring effect in Foreign Institutional Investment and concluded that
prior foreign ownership influences the momentum of foreign investments. Anchoring effect is also studied in
different type of financial markets such as horse race betting (Johnson and Schnytzer (2009) real estate
investment [(Einio, Kaustia & Putton,2008), Saieler et al. (2010), (Bucchianeri & Minson,2013)]. The
anchoring effect has also been found important in analyst‟s forecasting of firm‟s earning (Cen, Hillary & Wei
(2013) and in macroeconomic releases (Campbell and Sharpe, 2009 and Hess & Orbe, 2013). A robust and
rigorous review of all major studies of anchoring effect is done by Furham & Boo (2011). This study tries to
take the study of Furnham and Boo a step ahead by narrowing the type of market and anchor. This study
systematically reviews the literature on anchoring effect in investment decision making of individuals
particularly in stock market.
2. Purpose:
The purpose of this paper is to systematically review the literature published in past 15 years (2001-2015) on
anchoring effect in investment decision making. The paper highlights the major gaps in the existing studies on
anchoring effect. It also aims to raise specific question for future research.
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No. of
Technique papers %age
Multiple Techniques 2 12.5
Regression Analysis 8 50
Correlation 1 6.25
Paired t- test 1 6.25
Simulation 1 6.25
Decomposition
Analysis 1 6.25
Time Series Analysis 1 6.25
Other 1 6.25
Total 16 100
Table 4 shows that 8 out of 16 studies used regression analysis as a statistical tool. Various type of regression
such as panel regression, cross sectional was used. Only two studies applied multiple techniques including the
combination of regression analysis, decomposition analysis, t-test etc.
4.6 Citation Analysis:
In this section, we have analyzed the selected articles on the basis of their citation in other publications to
identify the most relevant and important paper available on anchoring bias. We used Google Scholar to find the
citations. We found that 15 out of 16 articles were cited outside which shows that all the articles are important
in our research area. Although the citation for some papers is is very low. The treason may be that these
articles are very recent. We don‟t find citation for one article published in 2015. Table:5 represent the citation
of all the 16 articles which shows that there are only four articles whose citation is more than 100.
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5. Findings:
In this section, we discuss the findings and identify the research gaps on anchoring bias in investment decision
making. As discussed above, anchoring bias has flourished in every field, we have made the efforts to review
all the studies related to stock market investments only and identify the following:
i) Irrelevant anchors affect the judgment and lead to higher losses and additional regret of not
selling/ buying at time (Chapman and Johanson, 2002)
ii) Kaustia, Alho and Puttonen (2008) and George and Hwang (2004) suggested that professional
investors are less prone to anchoring bias than naïve investors. However, if the anchor is
purchase price or initial value, effect is same.
iii) Anchors works in short term only. However, Grinblatt and Han (2005), Park (2010) suggested
that, if these anchors are supported by some other determinants of stock prices, profit can be
earned in long term also.
iv) Chart patterns are also used as anchors and next day returns and price movements are predicted
by the professional investors. [Chang, Luo and Ren (2013)], [Baker, Pan & Wugler (2012)]
6. Research Gaps:
6.1 Limited number of studies:
We have found only 16 studies in last 15 years of time period on anchoring bias in stock market investment
which is very less in number. In the emerging fields like behavioral finance, the studies should be more and
more models should be created to identify the anchoring bias in stock market.
6.2 Dearth of studies in emerging markets:
As the above analysis shows most of the studies are conducted in US stock market set up which is a
developed market. Limited research has been done in emerging countries.
6.3 Most studies are based on secondary research:
Most of the studies are based on secondary data which demonstrate the past behavior. A very few studies used
primary data through experiment to analyse the anchoring bias. There is a scope of study conducted on the
basis of primary data so that the present and future behaviors of the investor could be predicted.
6.4 Limited studies on individual investors:
There are very few studies available on individual behavior. Most of the studies generalize the market as a
whole.
7. Scope for Future Research:
The main purpose of this paper was to review the available literature on past 15 year on anchoring effect in
stock market to identify the type of researches conducted and to analyse their findings. The analysis of these
studies has come up with the new issues in the area of research which are discussed above. So, as discussed,
there is a very few researches have conducted to analyse the anchoring bias. Hence there should be more
studies. Moreover, these studies should also focus the emerging markets as it has been observed that after the
era of globalization, emerging economies have higher growth potential and institutional and individual
investors are more interesting in investing in these markets. Also, the research should be done equally on all
types of investors like individuals, institutional; market etc and a comparison should be made to get a clear
picture of the effect of anchoring in investment on different categories of investors. There is a scope of study
conducted on the basis of primary data so that the present and future behaviors of the investor could be
predicted.
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