Judgment under Uncertainty: Heuristics and Biases. Tversky A, Kahneman D.

This article described three heuristics that are employed in making judgements under uncertainty: (i)
representativeness, which is usually employed when people are asked to judge the probability that an
object or event A belongs to class or process B; (ii) availability of instances or scenarios, which is often
employed when people are asked to assess the frequency of a class or the plausibility of a particular
development; and (iii) adjustment from an anchor, which is usually employed in numerical prediction
when a relevant value is available. These heuristics are highly economical and usually effective, but they
lead to systematic and predictable errors. A better understanding of these heuristics and of the biases to
which they lead could improve judgements and decisions in situations of uncertainty.

Anchoring bias in decision-making
Anchoring or focalism is a term used in psychology to describe the common human tendency to rely too
heavily, or "anchor," on one trait or piece of information when making decisions.
During normal decision making, individuals anchor, or overly rely, on specific information or a specific
value and then adjust to that value to account for other elements of the circumstance.
Usually once the anchor is set, there is a bias toward that value.
Take, for example, a person looking to buy a used car - they may focus excessively on the odometer
reading and the year of the car, and use those criteria as a basis for evaluating the value of the car, rather
than considering how well the engine or the transmission is maintained.

In past issues of Negotiation, weve reviewed the anchoring effect the tendency for negotiators to
be overly influenced by the other sides opening bid, however arbitrary. When your opponent makes
an inappropriate bid on your house, youre nonetheless likely to begin searching for data that
confirms the anchors viability. This testing is likely to affect your judgment to the other partys
advantage.
Psychologists Amos Tversky and Daniel Kahneman identified the anchoring effect in 1974.
Participants watched a roulette wheel that, unknown to them, was rigged to stop at either 10 or 65,
the estimated the number of African countries belonging to the United Nations. For half of the
participants, the roulette wheel stopped on 10. They gave a median estimate of 25 countries. For the
other half, the wheel stopped on 65. Their median estimate was 45 countries. The random anchors
dramatically affected judgment.

http://blog.budzier.com/2008/08/12/judgment-under-uncertainty-heuristics-and-biases-kahneman-
tversky-1974/

http://en.wikipedia.org/wiki/Anchoring_and_adjustment

http://www.zerohedge.com/news/2013-05-22/try-experiment-yourself
http://thebuildnetwork.com/leadership/anchoring-experiment/ DAN ARIELY

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2388706