DOCTRINA ADMINISTRATIVA Y JURISPRUDENCIA.

The most significant finding of the present survey was that no anchoring effect occurred. This result is in stark contrast with studies showing the general robustness and durability of anchoring (e.g. Ariely et al., 2003; Chapman & Johnson, 1994; Mussweiler, 2001; Wilson et al., 1996) and specifically with studies showing significant anchoring effects in the stock market environment (e.g. Kaustia et al., 2009; Mussweiler & Schneller, 2003). In order to explain the anomalous finding, four aspects of the research will be focused on and it will be shown how each aspect contributed to the overall results. These aspects are the informativeness of the anchor, decreased uncertainty, multiple anchors and elaboration.

5.2.1 Informativeness of the anchor

The strong correlation found between the informativeness of the anchor and the magnitude of the anchoring effect, combined with the lack of a measure of informativeness in most anchoring studies, suggests that the magnitude of the anchoring effect may often be explained by the conscious use of the anchor by research participants. This is especially true when the anchor is theoretically uninformative but realistic (such as a house’s listing price or a share’s past price; Northcraft & Neale, 1987; Mussweiler & Schneller, 2003). With such anchors, participants might not be aware of the normative theory, or they may only partially agree with the theory, resulting in the conscious use of the anchor.

However, the present study’s results cannot be explained solely by the informativeness of the anchor. For one, if we assume the anchoring effect found by Mussweiler and Schneller

University

of Cape

Town

94

(2003) is purely the result of the anchor being consciously used it would necessarily imply that almost all participants found the anchor to be either moderately or significantly informative. There is no evidence to suggest that this would be the case. The present study used a student sample similar to the sample used by Mussweiler and Schneller, and only 38% of students considered the anchor moderately or significantly informative. Furthermore, the informativeness theory fails to explain why no anchoring effect occurred when participants considered the anchor uninformative. As far back as Tversky and Kahneman’s (1974) wheel of fortune, there has been evidence that anchors which participants consider uninformative exert a powerful effect on subsequent judgements and this finding has only been reinforced in recent years (e.g. Chapman & Johnson, 1999; Mussweiler & Strack, 2000b; Simonson & Drolet, 2004).

As a result, the informativeness of the anchor explains the magnitude of the anchoring effect in some studies on anchoring and adjustment but it fails to explain the lack of an anchoring effect in the present study.

5.2.2 Decreased uncertainty

One of the preconditions for anchoring to occur is uncertainty (Tversky & Kahneman, 1974). When participants know or have a way to calculate the answer, heuristic use is unlikely to occur (Strack & Mussweiler, 1997). As significant quantitative data were provided to participants, including three commonly used valuations, it is possible that participants in this study relied on this information and their knowledge of share valuation methods to obtain an ‘objective’ valuation, thus nullifying the anchors. It should be noted that it is not important whether the firm’s fundamental value was uncertain, but rather whether participants were uncertain about the answer. Participants who followed simple rules such as “DDM provides the most accurate share valuations” would have had a certain answer even if the firm’s actual value was uncertain. It should further be noted that the presence of the quantitative valuations would not be enough, on its own, to mitigate the anchoring effect as participants who need to choose between four valuations would still be influenced by selective accessibility anchoring. Instead, the presence of both valuations and simplifying rules would be needed.

While this theory explains the lack of an anchoring effect, it is contradicted by the results from the modified and unmodified valuation groups. Participants whose estimate of share value were unmodified from the quantitative valuations provided to them should, according to the theory of decreased uncertainty, have shown the smallest anchoring effect as they were the participants most likely to have relied on their knowledge of valuation methods to make a decision. Participants in the modified group who chose values not provided to them

University

of Cape

Town

95

should have felt more uncertainty and thus showed a larger anchoring effect. An analysis of the data found the opposite result with participants from the unmodified group displaying a significant anchoring effect ( ) while participants from the modified group displayed no anchoring effect ( ). As such, it is unlikely that the lack of an anchoring effect was caused by decreased uncertainty.

5.2.3 Multiple anchors

The present study’s most significant deviation from the experiment conducted by Mussweiler and Schneller (2003) is the inclusion of quantitative valuations in the research materials. These valuations were included in order to align the information provided to participants more closely with the information analysts use to determine fundamental value. These values also have the potential of serving as anchors. Since only one of the anchors (the peak or trough on the stock chart) was manipulated to differ between the conditions and the other anchors were held constant, an anchoring effect was expected. However, as suggested by Whyte and Sebenius (1997), if the quantitative valuations acted as salient comparison standards they could have diminished the anchoring effect by decreasing the chance of the manipulated anchor being used, diluting the effect of the manipulated anchor and resulting in information inconsistent with the manipulated anchor being activated.

Since there were multiple quantitative valuations, anchors inconsistent with both the manipulated trough and peak on the stock chart were present. Furthermore, and in contrast with the research on multiple anchors, these anchors were more intuitive comparison standards than the trough or peak on the stock chart. As a result, it is likely that the process Whyte and Sebenius (1997) suggested whereby the anchoring effect is diminished through dilution and contradictory anchoring information completely mitigated the anchoring bias. As the investment environment is filled with anchors, these findings suggest that any anchoring effect would be diminished in many investment situations.

The results can further be interpreted based on research by Ariely et al. (2003). According to Ariely and colleagues, people show coherent arbitrariness: People coherently interpret information around an arbitrary starting point. The starting point is determined by the first anchor participants use, while each subsequent anchor is coherently interpreted based on this starting point. As such, the initial anchor is significantly more impactful than subsequent anchors. While the manipulated anchor was presented first in the present study, it was not necessarily as intuitive a comparison standard as the current stock price or the quantitative valuations and as such may not have been used immediately. Even though non-initial anchors still result in an anchoring effect (Ariely et al., 2003), this effect is small and, given the variance of the dependent variable and the variety of potential initial anchors, might not

University

of Cape

Town

96 be detectable.

It should further be noted that, by manipulating the stock chart to include a peak or a trough, another anchor with implications contrary to the manipulated anchors was created. De Bondt (1993) found that non-expert investors often rely on price trends, which they expect to continue. By creating stock charts with an equal closing price, the peak on the price chart necessarily resulted in a downwards trend toward the current price, while the trough resulted in an upwards trend. Students who noticed these trends along with the manipulated anchor would have inadvertently used the consider-the-opposite technique, mitigating some of the anchoring effect (Mussweiler et al., 2000). Mussweiler and Schneller (2003) found the assimilative effects of the price peak and trough to be stronger than those of the trend, but in the present study, where the price peak and trough was not necessarily the initial anchor, this might not be true.

The presence of multiple anchors best explains the lack of an anchoring effect in the present study. As Mussweiler and Schneller (2003) did not include quantitative valuations (which are natural comparison standards) it also explains the results differing between these studies, and while the anchoring effect found in the unmodified group cannot be explained by the theory of multiple anchors, the unmodified group’s results do not contradict the theory either.

5.2.4 Elaboration

An intuitive explanation of the modified and unmodified results is that participants who modified the valuations engaged in a more thorough analysis of the information and thus relied less on heuristics (Edwards & Weary, 1993). While elaboration results in a smaller bias for most heuristics, it is generally not true with anchoring and adjustment. In fact, Chapman and Johnson (1999) found that increased elaboration resulted in a larger anchoring bias, and this was confirmed by Bodenhausen, Gabriel and Lineberger (2000) and Epley and Gilovich (2005). Epley and Gilovich’s (2005) research mentions an important caveat, however: If elaboration and effortful thought is “systematically different in both its content and implications” (p. 202), it would reduce the anchoring effect by activating anchor inconsistent information. As the researchers point out, this typically does not occur. However, there are multiple plausible comparison standards in the present study. Participants who engage in more effortful thought are more likely to test these valuations as possible answers, and since there are both high and low valuations, participants who analyse the valuations will activate information consistent and inconsistent with the provided anchors, resulting in a balanced knowledge pool. In contrast, participants in the unmodified group are likely to engage in less effortful thinking. For these participants, the anchor creates a biased knowledge base which affects the valuation method chosen and, since participants

University

of Cape

Town

97

rely purely on the valuation method to value the firm, the anchor affects participants’ estimates of fundamental value.

The data thus suggest that a significant number of participants in the unmodified group relied on a biased knowledge pool to choose a valuation method without considering the other valuations in greater depth. However, as with other experiments on the anchoring effect, it is impossible to state that all participants in one condition used a specific cognitive process. While this theory therefore provides a convincing explanation for the difference between the modified and unmodified groups, more research on the cognitive processes used to reach modified and unmodified valuations is needed.