To estimate the value of a variable, people usually start the estimation process by basing a mental first digit (a point of reliance based on past records) and then try to make the desired positive or negative adjustment on that digit, to New information is obtained. Numerous studies have shown that people do this regardless of the quality and how they choose to rely on, so they are not able to make enough adjustments. This adjustment is often incomplete and the result will be biased. Individuals generally perform better in relative estimates than in absolute estimates. The following example illustrates this point.
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Suppose you are asked that Canada has a population of 20 million or less. Assuming that the answer is clear, your answer is twofold, either over 20 million people or less. Now if you were asked to guess the absolute population of Canada, your estimate would probably be close to 20 million. Because you – like many people – are generally exposed to the bias of reliance on your previous response.
Technical description of reliance and adjustment bias
Reliance and adjustment is a psychological process that influences people’s approach to probability estimation. Investors who are exposed to this type of bias often act on individual preferences (not a clear rule) under the influence of the purchase price – or another price level or price index – and when faced with a question such as should Should I buy or sell this share? Or the question of whether the market has estimated the price of this share below its intrinsic value or higher? They resort to the point of reliance.
Rational investors deal with new information realistically and without bias, and do not involve predetermined points, such as purchase prices or target prices, in their decisions. But adjustment bias allows investors to see new information from behind a pair of twisted lenses. These investors focus on points of psychological rather than statistical reliance (points that are based solely on their individual desires and preferences and are over-considered). Thus, financial decisions based on the norms prescribed by the neoclassical school are logical. Being takes distance.
Suggestions for overcoming reliance and adjustment bias
It is important to note that you can really use this behavior to your advantage before considering specific strategies for dealing with reliance bias. For example, understanding this behavior when negotiating and bargaining is a prominent advantage. Many negotiators believe that one of the parties to the negotiation can start the negotiation by offering a price offer or a specific condition, in which case the other party’s offer will be affected, which is a reflection of reliance. Some argue that even if the point of reliance is extreme, this rule works relatively well. Therefore, when negotiating, it is better to start with an offer that is strict in relation to the real situation (of course, you should avoid exaggeration).
When giving someone a set of options, first state the options you would prefer the other person to choose. Reciprocally when the negotiating party makes its first offer. Do not think that this is the final figure.
In the field of investment, awareness is the best solution against reliance and adjustment bias. When advising a client to sell a particular stock, encourage them to ask themselves: Have I reasonably analyzed the situation, or have I offered a sale at a predetermined price? (Due to reliance) Can I get it? When forecasting, ask yourself about the direction or extent of changes in the market or securities: Is the estimate rational or is it influenced by previous year’s prices (reliance)? These measures are effective in counteracting the types of reliance and adjustment bias that may occur during the sale or redistribution of assets.
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