Anchoring is a psychological phenomenon that says that whenever you have a number in mind, it will influence your judgment. In one experiment people were asked to spin a wheel of fortune. After it landed on a number they were asked whether the percentage of nations in the UN was larger or smaller than that number. When the wheel of fortune landed on 10, people estimated that 25% of the members of the UN were African. When it landed on 65, they estimated that 45% of the countries in the UN were African. If you asked them why they came up with the number, they said it was their best guess. But clearly the wheel of fortune had an enormous influence. Anchoring is everywhere in the financial markets. When a stock goes to $100 and splits 2 for 1 so that you now have two shares worth $50 each, you naturally expect both shares to go back up to $100. Anchoring informs a lot of our decisions even though we think it doesn't. When professional auditors were asked whether the incidence of fraud is greater or lesser than 10% and then asked what they thought the actual incidence of fraud was, they gave a number that was close to 10%. But when they were asked if it was greater or lower than 1%, they picked a lower number. When asked why they picked that number, they talked about their experience and how many frauds they've encountered. They had no idea their number came from being anchored.

Fascinating.