Anchoring Effect in the Market: Perspective from Market Interaction and Stock Investment

Abstract

The anchoring effect illustrates how a reference point affects human behavior. This paper reviews a variety of prior studies on the anchoring effect, including the analysis of its impact on stock prices and returns, the real estate market and the process of making investment decisions, and consumer and supplier preferences. The purpose of this paper is to discuss the significance of anchoring effect by classifying previous research into two categories: market interaction and stock investment, and then providing additional analyses of how the anchoring effect is applied to these two fields of human behavior. The database is supplemented by a case study of Ghana, and the methodology of this paper comprises the thorough evaluation of prior studies with accurate descriptions of how the relevant literatures were selected. This paper identifies the crucial components that contribute to an anchoring effect and analyses the chain of consequences it leads to in the conclusion section. The anchoring bias influences market interaction by alternating consumers’ perception on the prices of goods and services, which ultimately affects their purchasing decisions. It also has an impact on how suppliers decide how much to supply. The anchoring bias is present during the process of stock price forecasting for the analysts, who use the initial stock price as a reference point. Therefore, the analysts’ estimates of future stock prices have an impact on investors’ decisions to invest. This paper also provides further suggestions such as how investors should make decisions in order to support future research.