There is no antidote for the human tendency to use (and abuse) anchors, other than to be aware of when you are relying on this heuristic, and then considering carefully the relevance of anchors, allowing multiple anchors to dilute the influence of any single reference point.
A related mental shortcut is overconfidence bias. We like to be right, and therefore place too much confidence in the accuracy of our own judgments. The overconfidence bias is essentially a psychological restatement of something our mothers always told us when as children we got too big for our britches: “You’re not as smart as you think you are.” We’re still not. We tend to place too much confidence in the accuracy of our own judgments, opinions and beliefs, and additional information is likely to increase that confidence, even if it was poorly supported in the first place. We naturally look for confirming evidence of what we “know” to be true, and discount or even ignore contradictory information. Or, as articulated more elegantly by those two great American philosophers Paul Simon and Art Garfunkel, “Still a man hears what he wants to hear, and disregards the rest.”
Researchers test this bias by having subjects provide a range of estimates on quantitative questions on a variety of subjects. The purpose of this testing isn’t to gauge actual knowledge, but to demonstrate how, in our desire to be right, we wind up overconfident. Ranges of estimates in experiments like this are invariably too small. Go back to the question of how long it takes Neptune to orbit the sun. Instead of anchoring and adjusting to an answer, think instead of a low and high range so that you’re 90% confident (and that’s pretty sure) that the right answer falls within your range. Most of you will come up with a range that is far too narrow. (Now you can google the answer.)
A bias toward confirming evidence feeds overconfidence. You may read a particular proposal for reopening the economy post-COVID-19 that agrees with your own opinion, and you naturally (and subconsciously) think more highly of the author. After all, she agrees with you (and confirms your opinion), so she must be smart. Another article which challenges your conclusion is readily dismissed as coming from an economist at a second-rate college, and what does he know about the practical challenges of running a business anyway? The fact is, these things take place automatically, below the surface of consciousness. Again, these aren’t signs of mental impairment or poor thinking! Just evidence that we are all too human.
We are accustomed to thinking of probability and uncertainty in bounded terms. The classic analogies for taking a chance on an unknown outcome are flipping a coin or rolling a die. Yet life doesn’t look like these simple models, where the range of potential outcomes is known in advance. In the real world, we don’t know how many sides the die has or what is on them. If the coronavirus crisis has taught us nothing else, it has proven that many probabilities lie beyond the realm of our imagination.
The investment universe is replete with examples of the overconfidence bias. Turn on any financial news network, and someone will be telling you that they’re sure that the market has formed a bottom. Wait 10 minutes, and the next guest will, with equal confidence, lay claim to the opposite opinion. Unwarranted confidence in the direction of a stock or the overall market has been the undoing of many an investor. The belief that the market has bottomed, confirmed by every day that it inches higher, leads you to ignore evidence that risks still abound. Or, vice versa, the litany of bad news crawling across your television or phone convinces you that there is more pain to come and that the overoptimistic managers talking about investment opportunities are turning a blind eye to reality. The point is that all these seemingly contradictory things can all be true at once: It’s just hard to hold them all in your head at the same time without allowing one or the other set to confirm a conclusion that you’ve already reached without realizing it.
As with the anchoring bias, awareness is the best antidote to overconfidence. Acknowledge the other side of an argument, and actively seek out contradictory evidence to what you believe to be true. This doesn’t imply that you have to change your mind every time you encounter a conflicting piece of information – far from it. Dealing honestly and fairly with conflicting information makes you a better thinker (and investor), not a weaker one.