Getting A Grip on Anchoring Bias and Projection Bias
This article is part 2 of a feature based on NFA — Behavioral Bias and $WHALE community member Phoenix, a thought leader on asymmetric strategy and strategic theory.
Their collaboration brings the NFT community useful insights into ourselves, the market and how to trounce obstacles both inner and outer on our trip to the moon and beyond.
Start with Part 1 here to learn about confirmation bias and herd mentality bias. We’re going to talk about anchoring bias and projecting bias in this post, two biases that unfortunately feed off each other in insidious and damaging ways.
The interviews for these articles took place sometime in the beginning of 2022. Their publication was delayed for quite some time. They were originally written for whale.me.
TLDR
- an anchoring bias means you’re stuck on a piece of arbitrary information that likely has no basis in rational fact
- being led by emotion and historical anchors rather than fact can make for some pretty bad decisions
- if you have a strong emotion about something anchoring and projection bias form a potent blinder to make you believe everyone else must have that same strong emotion as well
- flexibility and humility are keys to beating biases
Anchoring Bias
The Bias
According to Investopedia.com, “anchoring is a behavioral finance term to describe an irrational bias towards an arbitrary benchmark figure.
- This benchmark then skews decision-making regarding a security by market participants, such as when to sell the investment.
- Anchoring can be used to advantage in sales and price negotiations where setting an initial anchor can influence subsequent negotiations in your favor.”
Phoenix explains anchoring bias as what happens when people are relying on too much information when they’re making their decisions or when they are anchored on a certain price. He specifically addresses the instance when said anchor is the first number thrown out as a reference point of negotiation. “Everybody will compare and make estimations off of that point, which may or may not be relevant or pertinent to what you’re speaking about.”
“Whatever price is thrown out there, that’s the one that’s going to be continuously referenced. “— Phoenix
The Detriment
When you fall sway to anchoring bias, as per Investopedia (a good resource for beginners learning about both traditional and decentralized finance), you are setting yourself up for failure in several ways:
- Being stuck on one specific anchor could cause you to buy an undervalued investment or sell an overvalued investment.
- You may be driven to hold investments that have lost value. You might keep anchoring their fair value estimate to the original price rather than to fundamentals. This puts you at greater risk of financial loss because you’re holding the investment in the hope it will recoup its purchase price. An acquisition price is considered a historical anchor, as is a high floor, for an example relevant to the NFT marketplace.
- You may be working off of completely irrational emotional responses and be unaware of how they are coloring your decision making process, as emotions also serve as historical anchors.
The Solution
“Market participants can counter anchoring bias by identifying the factors behind the anchor and replacing suppositions with quantifiable data. Comprehensive research and assessment of factors affecting markets or a security’s price are necessary to eliminate anchoring bias from decision-making in the investment process.” — Investopedia
Iluscavia shares his own strategies on beating anchoring bias with us. “The way I’ve dealt with anchoring biases was to try and do as much research as I could ahead of time so that I at least had an independent validation that was not anchored to anything in the actual discussion, so that I could at least have as much objectivity going into it (as possible) but also being open to that if the numbers proposed in any negotiation or acquisition or what have you were actually above my independently assessed, then i would at least try to incorporate that data as I went forwards to try and have optimal flexibility.”
Projection Bias
The Segue
That’s a segue, all right.
Iluscavia goes on to elaborate on how anchoring bias segues into projection bias within the NFT market and how those biases working in tandem may well lead you to a poor decision.
“If someone’s aware of what an NFT or an asset is worth — they have a value at which point they would possibly purchase it. But when it starts declining and goes through it, they were anchored to what they thought the value was but they’re projecting that it might keep going down. Then, when the two of (those biases) work whether you say in concert or against each other the individual may not wind up purchasing the undervalued asset, period, because they’re waiting for an additional decline. But when it jumps back up they are now anchored to the low price and even missed buying back at the price that they had already identified just because it no longer was the bottom price.”
The Bias
According to Explore Psychology, “The projection bias is a type of cognitive bias that involves overestimating the degree to which other people agree with us. People tend to assume that others think, feel, believe, and behave much like they do. They assume that their way of thinking about something or doing things is typical, and therefore other normal people will respond in a very similar manner.”
Basically, if you have a strong emotion about something, you think everyone else in your crowd must obviously share that emotion. You are anchored to what you believe is the normalcy of that emotion, when everyone else around you may or may not think you’re trippin’.
The Detriment
Emotions are not facts. It goes without saying that anyone who reacts to a financial situation when their emotions are at the wheel is at great risk of failure. You need to look at the numbers, not freak out because of how you feel. Though there is certainly place for gut feelings and intuition, to base your financial strategy on what makes you feel good instead of long-term goals is a recipe for disaster.
For example, say someone really wants to lose weight but there is a ginormous plate of delicious looking cinnamon buns there for the taking. Most times, your immediate desires will override your long-term plan, and you’ll eat four of them instead of keeping your future goals in mind.
The Solution
Make sure your emotions are in check and that you’ve slept well before undertaking any significant financial decisions. Do your own research and look at the numbers. If you don’t know what you’re looking at, get objective feedback from frens you trust. And put down the doughnut.
In Conclusion
Iluscavia warns that there are companies basically forming around the concept of exploiting our human failings in order for them to make money through the use of machine learning.
“If we are at least aware of this, we can try to understand how the market is behaving around us and protect ourselves from not only making silly mistakes, but being the reason that a hedge fund can make even more money based on our failings.” he surmises.
“It’s about flexibility. It’s about having independent assessments. It’s about being humble.” -Iluscavia
“At least from my perspective, if I need to try and be flexible andindependent in my thinking, checklists have worked well in the pastwhen I’m assessing something I want to buy. Having a trusted person I can rely on for information or at least for an independent viewpoint. Just being aware that we’re all subjected to these biases makes us all the more resilientagainst that.”
Reading List
Phoenix recommends “Thinking Fast and Slow” by Daniel Kahneman, as well as works by Dan Ariely and Gary Klein for more reading on this integral subject.
Digital Napalm is a creative Web3 ideation firm led by The Cryptory, former writer for whale.me and scrt.network.
