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What is Anchoring and Adjustment

Handbook of Research on Behavioral Finance and Investment Strategies: Decision Making in the Financial Industry
A heuristic used to estimate an unknown value by starting with a known figure (anchor) which is then adjusted to arrive at a final value. In this case, people tend to get biased towards the anchor rather than away from it.
Published in Chapter:
Theory of Behavioral Finance
Jaya M. Prosad (Jaypee Business School, India), Sujata Kapoor (Jaypee Business School, India), and Jhumur Sengupta (Management Development Institute, India)
DOI: 10.4018/978-1-4666-7484-4.ch001
This chapter explores the evolution of modern behavioral finance theories from the traditional framework. It focuses on three main issues. First, it analyzes the importance of standard finance theories and the situations where they become insufficient i.e. market anomalies. Second, it signifies the role of behavioral finance in narrowing down the gaps between traditional finance theories and actual market conditions. This involves the substitution of standard finance theories with more realistic behavioral theories like the prospect theory (Kahneman & Tversky, 1979). In the end, it provides a synthesis of academic events that substantiate the presence of behavioral biases, their underlying psychology and their impact on financial markets. This chapter also highlights the implications of behavior biases on financial practitioners like market experts, portfolio managers and individual investors. The chapter concludes with providing the limitations and future scope of research in behavioral finance.
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