price anchoring

25 results back to index


pages: 519 words: 104,396

Priceless: The Myth of Fair Value (And How to Take Advantage of It) by William Poundstone

Amazon: amazon.comamazon.co.ukamazon.deamazon.fr

availability heuristic, Cass Sunstein, collective bargaining, Daniel Kahneman / Amos Tversky, delayed gratification, Donald Trump, East Village, en.wikipedia.org, endowment effect, equal pay for equal work, experimental economics, experimental subject, feminist movement, game design, German hyperinflation, Henri Poincaré, high net worth, index card, invisible hand, John von Neumann, laissez-faire capitalism, loss aversion, market bubble, mental accounting, meta analysis, meta-analysis, Nash equilibrium, new economy, payday loans, Potemkin village, price anchoring, price discrimination, psychological pricing, Ralph Waldo Emerson, RAND corporation, random walk, RFID, Richard Thaler, risk tolerance, Robert Shiller, Robert Shiller, rolodex, Steve Jobs, The Chicago School, The Wealth of Nations by Adam Smith, ultimatum game, working poor

Balthazar isn’t taking any chances about that: it’s got a picture at upper right, another way to draw the eye. From there the gaze usually moves down to the center of the right page. Menu consultants use these prime menu spaces for high-profit items and price anchors. In this case, the anchor is the Le Balthazar seafood plate, for $110. Psychophysics says that the contrast effect is strongest in the immediate vicinity of a stimulus. It’s anyone’s guess whether this applies to prices on menus, but consultants seem to believe it does. They recommend putting high-profit items immediately adjacent to the high-priced anchor. The real agenda of the $110 price is probably to induce customers to spring for the $65 Le Grand plate just to the left of it or the more modest seafood orders below it. A box around a menu item draws attention and, usually, orders.

Some volunteers were asked to name their price for the sound and also to rank it on a list of minor annoyances. The peeves included “discovering you purchased a spoiled carton of milk,” “forgetting to return a video and having to pay a fine,” “having your ice cream fall on the floor,” and seven other items. Overall, the annoying sound came in #2 on the list, behind “missing your bus by a few seconds.” The telling thing is this. The 10- and 50-cent price anchors had no effect on the ranking of the annoying noise. Everyone approximately agreed on how bad the noise was, relative to life’s other little annoyances. Another group of volunteers consented to put a finger in a vise. The experimenter tightened the vise until the subject said he was beginning to experience pain (the “pain threshold”). Then the vise was tightened a millimeter more. The subject was instructed to remember that level of pain.

It paid over $1,700 per square foot for its Rem Koolhaas–designed store in SoHo and is forking over equally stratospheric rents. It would not devote floor space to goods that hardly ever sell unless there was a reason for it. Trade-off contrast is part of the cost of doing business, like advertising or window displays or “starchitect” designs. It’s not unusual to find items similar to the high-priced anchor selling for a tenth as much. Anyone who can’t swing that can always try the $300 sunglasses. Or the $110 mobile phone charm. The British Prada website hints at where the money is (online, at any rate). It offers 10 makes of women’s shoes, 23 handbags, and 54 “gifts”—trinkets like keychains, bracelet charms, and golf tee holders. At £60 for a bracelet charm, the profit margin must be staggering.


pages: 383 words: 108,266

Predictably Irrational, Revised and Expanded Edition: The Hidden Forces That Shape Our Decisions by Dan Ariely

Amazon: amazon.comamazon.co.ukamazon.deamazon.fr

air freight, Al Roth, Bernie Madoff, Burning Man, butterfly effect, Cass Sunstein, collateralized debt obligation, computer vision, corporate governance, credit crunch, Daniel Kahneman / Amos Tversky, David Brooks, delayed gratification, endowment effect, financial innovation, fudge factor, Gordon Gekko, greed is good, housing crisis, invisible hand, lake wobegon effect, late fees, loss aversion, market bubble, Murray Gell-Mann, payday loans, placebo effect, price anchoring, Richard Thaler, second-price auction, Silicon Valley, Skype, The Wealth of Nations by Adam Smith, Upton Sinclair

From then on, we are willing to accept a range of prices—but as with the pull of a bungee cord, we always refer back to the original anchor. Thus the first anchor influences not only the immediate buying decision but many others that follow. We might see a 57-inch LCD high-definition television on sale for $3,000, for instance. The price tag is not the anchor. But if we decide to buy it (or seriously contemplate buying it) at that price, then the decision becomes our anchor henceforth in terms of LCD television sets. That’s our peg in the ground, and from then on—whether we shop for another set or merely have a conversation at a backyard cookout—all other high-definition televisions are judged relative to that price. Anchoring influences all kinds of purchases. Uri Simonsohn (a professor at the University of Pennsylvania) and George Loewenstein, for example, found that people who move to a new city generally remain anchored to the prices they paid for housing in their former city.

In other words, the sensitivity we show to price changes might in fact be largely a result of our memory for the prices we have paid in the past and our desire for coherence with our past decisions—not at all a reflection of our true preferences or our level of demand. The same basic principle would also apply if the government one day decided to impose a tax that doubled the price of gasoline. Under conventional economic theory, this should cut demand. But would it? Certainly, people would initially compare the new prices with their anchor, would be flabbergasted by the new prices, and so might pull back on their gasoline consumption and maybe even get a hybrid car. But over the long run, and once consumers readjusted to the new price and the new anchors ( just as we adjust to the price of Nike sneakers, bottled water, and everything else), our gasoline consumption, at the new price, might in fact get close to the pretax level. Moreover, much as in the example of Starbucks, this process of readjustment could be accelerated if the price change were to also be accompanied by other changes, such as a new grade of gas, or a new type of fuel (such as corn-based ethanol fuel).

And more importantly, does that price (which in academic lingo we call an anchor) have a long-term effect on our willingness to pay for the product from then on? It seems that what’s good for the goose is good for humans as well. And this includes anchoring. From the beginning, for instance, Assael “anchored” his pearls to the finest gems in the world—and the prices followed forever after. Similarly, once we buy a new product at a particular price, we become anchored to that price. But how exactly does this work? Why do we accept anchors? Consider this: if I asked you for the last two digits of your social security number (mine are 79), then asked you whether you would pay this number in dollars (for me this would be $79) for a particular bottle of Côtes du Rhône 1998, would the mere suggestion of that number influence how much you would be willing to spend on wine?


pages: 898 words: 266,274

The Irrational Bundle by Dan Ariely

Amazon: amazon.comamazon.co.ukamazon.deamazon.fr

accounting loophole / creative accounting, air freight, Albert Einstein, banking crisis, Bernie Madoff, Black Swan, Broken windows theory, Burning Man, business process, cashless society, Cass Sunstein, clean water, cognitive dissonance, computer vision, corporate governance, credit crunch, Credit Default Swap, Daniel Kahneman / Amos Tversky, delayed gratification, Donald Trump, endowment effect, Exxon Valdez, first-price auction, Frederick Winslow Taylor, fudge factor, George Akerlof, Gordon Gekko, greed is good, happiness index / gross national happiness, Jean Tirole, job satisfaction, knowledge economy, knowledge worker, lake wobegon effect, late fees, loss aversion, Murray Gell-Mann, new economy, Peter Singer: altruism, placebo effect, price anchoring, Richard Feynman, Richard Feynman, Richard Thaler, Saturday Night Live, Schrödinger's Cat, second-price auction, shareholder value, Silicon Valley, Skype, software as a service, Steve Jobs, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, ultimatum game, Upton Sinclair, Walter Mischel, young professional

From then on, we are willing to accept a range of prices—but as with the pull of a bungee cord, we always refer back to the original anchor. Thus the first anchor influences not only the immediate buying decision but many others that follow. We might see a 57-inch LCD high-definition television on sale for $3,000, for instance. The price tag is not the anchor. But if we decide to buy it (or seriously contemplate buying it) at that price, then the decision becomes our anchor henceforth in terms of LCD television sets. That’s our peg in the ground, and from then on—whether we shop for another set or merely have a conversation at a backyard cookout—all other high-definition televisions are judged relative to that price. Anchoring influences all kinds of purchases. Uri Simonsohn (a professor at the University of Pennsylvania) and George Loewenstein, for example, found that people who move to a new city generally remain anchored to the prices they paid for housing in their former city.

In other words, the sensitivity we show to price changes might in fact be largely a result of our memory for the prices we have paid in the past and our desire for coherence with our past decisions—not at all a reflection of our true preferences or our level of demand. The same basic principle would also apply if the government one day decided to impose a tax that doubled the price of gasoline. Under conventional economic theory, this should cut demand. But would it? Certainly, people would initially compare the new prices with their anchor, would be flabbergasted by the new prices, and so might pull back on their gasoline consumption and maybe even get a hybrid car. But over the long run, and once consumers readjusted to the new price and the new anchors (just as we adjust to the price of Nike sneakers, bottled water, and everything else), our gasoline consumption, at the new price, might in fact get close to the pretax level. Moreover, much as in the example of Starbucks, this process of readjustment could be accelerated if the price change were to also be accompanied by other changes, such as a new grade of gas, or a new type of fuel (such as corn-based ethanol fuel).

And more importantly, does that price (which in academic lingo we call an anchor) have a long-term effect on our willingness to pay for the product from then on? It seems that what’s good for the goose is good for humans as well. And this includes anchoring. From the beginning, for instance, Assael “anchored” his pearls to the finest gems in the world—and the prices followed forever after. Similarly, once we buy a new product at a particular price, we become anchored to that price. But how exactly does this work? Why do we accept anchors? Consider this: if I asked you for the last two digits of your social security number (mine are 79), then asked you whether you would pay this number in dollars (for me this would be $79) for a particular bottle of Côtes du Rhône 1998, would the mere suggestion of that number influence how much you would be willing to spend on wine?


pages: 306 words: 85,836

When to Rob a Bank: ...And 131 More Warped Suggestions and Well-Intended Rants by Steven D. Levitt, Stephen J. Dubner

Amazon: amazon.comamazon.co.ukamazon.deamazon.fr

Affordable Care Act / Obamacare, airport security, augmented reality, barriers to entry, Bernie Madoff, Black Swan, Broken windows theory, Captain Sullenberger Hudson, Daniel Kahneman / Amos Tversky, deliberate practice, feminist movement, food miles, George Akerlof, invisible hand, loss aversion, mental accounting, Netflix Prize, obamacare, oil shale / tar sands, peak oil, pre–internet, price anchoring, price discrimination, principal–agent problem, profit maximization, Richard Thaler, security theater, Ted Kaczynski, the built environment, The Chicago School, the High Line, Thorstein Veblen, transaction costs

., 138–40 Pataki, George, 119 Paulos, John Allen, 286 Paulson, Henry, 236 Peltzman, Sam, 166 penny, 61–65 penny floor, 65 Pepsico, 59–60 perfect substitutes, 60 petroleum extraction, 109–16 Pettitte, Andy, 149–50 Pham, David “the Dragon,” 193 pilots, 83–86 pirates, 314–19 Pittsburgh Steelers, 212–19 Plack, Les, 47 Planned Parenthood, 65–67 Pledge-a-Picket, 66 poker: cheating, 154–58 how not to cheat, 153–55 Internet, 127–30, 157 one card away from final table, 192–95 record that can never be broken, 192 shootout tournament, 193 World Series of Poker, 187–88, 192–95 Polamalu, Troy, 216 Poland Spring bottled water, 3–4 Pollan, Michael, 169 postage, exemption from, 141–43 practice, ten thousand hours, 199, 201–2 praise, 351 Pre-Implantation Genetic Diagnosis (PGD), 280–82 prices: anchoring, 309 of autographed baseballs, 80–81 bounty on bin Laden, 57–59 of cars, 54–57 of chicken wings, 75–77 and corporate sponsorships, 81 discrimination in, 173 of food, 116 of gas, 86–90 for hate mail, 49–51 housing, 67–69 of kiwifruits, 77–80 peak oil, 109–16 of a penny, 61–65 of prescription drugs, 52–54 rising, 110, 111 of shrimp, 344 of songs, 69–71 and substitutes, 113 supply and demand, 78–80, 110, 112, 115, 128, 341–44 of voices in animated films, 306 priming, 228–29 principal-agent problem, 209 Prius Effect, 185 procrastination, 121 profits, going green for, 172–74 pro-life movement, 65 prostitution: Berlin brothel, 173 escort service, 261–67 legalization of, 255–56, 265–67 race: in the marketplace, 315–22 TV viewing habits, 322–24 rain forest, saving, 174–75 randomization, 322 rational addictions, 92–94 Reeve, Christopher, 102 Reilly, Barry, 225–26 Rickman, Neil, 225–26 RICO (federal racketeering statutes), 232 Rios, Brandon, 72 risk-aversion, 125–27 risk-taking, 121 Rochambeau (Rock, Paper, Scissors), 188–89 Rodriguez, Alex, 149 Roethlisberger, Ben, 103 Roe v.


pages: 275 words: 82,640

pages: 295 words: 66,824

A Mathematician Plays the Stock Market by John Allen Paulos

Amazon: amazon.comamazon.co.ukamazon.deamazon.fr

Benoit Mandelbrot, Black-Scholes formula, Brownian motion, business climate, butterfly effect, capital asset pricing model, correlation coefficient, correlation does not imply causation, Daniel Kahneman / Amos Tversky, diversified portfolio, Donald Trump, double entry bookkeeping, Elliott wave, endowment effect, Erdős number, Eugene Fama: efficient market hypothesis, four colour theorem, George Gilder, global village, greed is good, index fund, invisible hand, Isaac Newton, John Nash: game theory, Long Term Capital Management, loss aversion, Louis Bachelier, mandelbrot fractal, margin call, mental accounting, Nash equilibrium, Network effects, passive investing, Paul Erdős, Ponzi scheme, price anchoring, Ralph Nelson Elliott, random walk, Richard Thaler, Robert Shiller, Robert Shiller, short selling, six sigma, Stephen Hawking, transaction costs, ultimatum game, Vanguard fund, Yogi Berra

technical analysis trading strategies unemployment whim World Class Options Market Maker (WCOMM) present value compound interest and discounting process for stock purchases based on price movements complexity changes over time extreme movements herd-like and volatile nature of insider trading and network effect on normal curve and power law and subterranean information processing and price, P/E ratio price targets anchoring effect and hype and unrealistic prices, of stocks manipulating for own benefit (management/CEO) oscillation created by investor reactions to each other reflecting publicly available information prisoner’s dilemma private information becoming common knowledge dynamic with common knowledge market predictions and probability coin flipping game and dice and gambling games games of chance outguessing the average guess St.


pages: 1,088 words: 228,743

Expected Returns: An Investor's Guide to Harvesting Market Rewards by Antti Ilmanen

Amazon: amazon.comamazon.co.ukamazon.deamazon.fr

Andrei Shleifer, asset allocation, asset-backed security, availability heuristic, backtesting, balance sheet recession, bank run, banking crisis, barriers to entry, Bernie Madoff, Black Swan, Bretton Woods, buy low sell high, capital asset pricing model, capital controls, Carmen Reinhart, central bank independence, collateralized debt obligation, commodity trading advisor, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, debt deflation, deglobalization, delta neutral, demand response, discounted cash flows, disintermediation, diversification, diversified portfolio, dividend-yielding stocks, equity premium, Eugene Fama: efficient market hypothesis, fiat currency, financial deregulation, financial innovation, financial intermediation, fixed income, Flash crash, framing effect, frictionless, frictionless market, George Akerlof, global reserve currency, Google Earth, high net worth, hindsight bias, Hyman Minsky, implied volatility, income inequality, incomplete markets, index fund, inflation targeting, interest rate swap, invisible hand, Kenneth Rogoff, laissez-faire capitalism, law of one price, Long Term Capital Management, loss aversion, margin call, market bubble, market clearing, market friction, market fundamentalism, market microstructure, mental accounting, merger arbitrage, mittelstand, moral hazard, New Journalism, oil shock, p-value, passive investing, performance metric, Ponzi scheme, prediction markets, price anchoring, price stability, principal–agent problem, private sector deleveraging, purchasing power parity, quantitative easing, quantitative trading / quantitative finance, random walk, reserve currency, Richard Thaler, risk tolerance, risk-adjusted returns, risk/return, riskless arbitrage, Robert Shiller, Robert Shiller, savings glut, Sharpe ratio, short selling, sovereign wealth fund, statistical arbitrage, statistical model, stochastic volatility, systematic trading, The Great Moderation, The Myth of the Rational Market, too big to fail, transaction costs, tulip mania, value at risk, volatility arbitrage, volatility smile, working-age population, Y2K, yield curve, zero-coupon bond

This generic nature of carry and value indicators is a clear advantage, given our inherently limited understanding of the ultimate drivers of expected asset returns. If expected returns vary over time, how can we know the current level of expected returns? In most cases we cannot. Sadly, the market’s expected returns are unobservable. The best we can do is estimate them, by hook or crook. The simplest and more popular approaches involve relating current market prices to some value anchors. If current market prices are low compared with such anchors (which can be as simple as historical average price, yield or spread, or something more complex), expected returns are deemed to be above average. Such value indicators do not reveal whether high current expected returns reflect irrational underpricing or rationally high risk premia. Moreover, these value indicators can be poor short-term predictors.

Sources: Bloomberg, Robert Shiller’s website, Moody’s, Ibbotson Associates (Morningstar), Federal Reserve Board, Blue Chip Economic Indicators. Table 21.1. Three building blocks of expected returns for diverse investments Value and carry indicators are reviewed above for stocks and bonds. Value and carry indicators for real estate, commodities, and currencies are discussed in Sections 11.2, 11.3, and 13.3. Value is typically based on deviation of current market price from some valuation anchor (such as purchasing power parity for currencies or rental income for real estate). In the absence of better value anchors, investors may use average real market price over the past few years to capture any mean reversion tendency. Natural value indicators exist for some systematic strategies (e.g., the dispersion of valuation ratios between value and growth stocks, or the implied-vs.

Evidence-Based Technical Analysis: Applying the Scientific Method and Statistical Inference to Trading Signals by David Aronson

Amazon: amazon.comamazon.co.ukamazon.deamazon.fr

Albert Einstein, Andrew Wiles, asset allocation, availability heuristic, backtesting, Black Swan, capital asset pricing model, cognitive dissonance, compound rate of return, Daniel Kahneman / Amos Tversky, distributed generation, Elliott wave, en.wikipedia.org, feminist movement, hindsight bias, index fund, invention of the telescope, invisible hand, Long Term Capital Management, mental accounting, meta analysis, meta-analysis, p-value, pattern recognition, Ponzi scheme, price anchoring, price stability, quantitative trading / quantitative finance, Ralph Nelson Elliott, random walk, retrograde motion, revision control, risk tolerance, risk-adjusted returns, riskless arbitrage, Robert Shiller, Robert Shiller, Sharpe ratio, short selling, statistical model, systematic trading, the scientific method, transfer pricing, unbiased observer, yield curve, Yogi Berra

The prior losers (future winners) were not more risky than the prior winners (future losers).54 This contradicts a central proposition of EMH that higher returns can only be earned by assuming higher risks. Additionally, it bolsters the notion that a very simplistic form of TA is useful. • Nonreversing momentum: When a stock’s momentum is measured by its proximity to its 52-week high, rather than its prior rate of return, profits are greater and momentum does not reverse.55 The author of this study speculates that investors become mentally anchored to prior 52-week price highs. Anchoring is known to prevent people from making appropriate adjustments to new information. The author of this study, Michael Cooper, conjectured that this prevents stocks near their 52-week highs from responding to new fundamental developments as rapidly as they should. Retarded news response engenders systemic price trends (momentum) that correct the mispricing. • Momentum confirmed by trading volume: Further support for the validity of TA comes from studies showing that, when trading volume is used conjointly with price momentum, even higher returns can be earned.

For example, if the wheel landed on the number 10, the median estimate was 25 percent, but when the wheel stopped on 65 the median estimate was 45 percent. The anchoring heuristic is thought to be related to investor underreaction. Underreactions to bullish news cause asset prices to remain too cheap, whereas underreactions to bearish news leave prices too dear. Over time, the market’s temporary state of inefficiency is resolved as prices drift (trend) to the rational level. Thus, anchoring can help explain the occurrence of price trends. Anchoring may explain the profitability of a momentum strategy alluded to earlier.67 It is based on a simple technical indicator, a stock’s proximity to its 52-week high. Because this information is available in newspapers and on various web sites, investors may fixate (anchor) on it. In other words, investors may fixate or anchor on the 52-week high price if a stock is currently trading near that level.


pages: 654 words: 191,864

Thinking, Fast and Slow by Daniel Kahneman

Amazon: amazon.comamazon.co.ukamazon.deamazon.fr

Albert Einstein, Atul Gawande, availability heuristic, Black Swan, Cass Sunstein, Checklist Manifesto, choice architecture, cognitive bias, complexity theory, correlation coefficient, correlation does not imply causation, Daniel Kahneman / Amos Tversky, delayed gratification, demand response, endowment effect, experimental economics, experimental subject, Exxon Valdez, feminist movement, framing effect, hindsight bias, index card, job satisfaction, John von Neumann, libertarian paternalism, loss aversion, medical residency, mental accounting, meta analysis, meta-analysis, nudge unit, pattern recognition, pre–internet, price anchoring, quantitative trading / quantitative finance, random walk, Richard Thaler, risk tolerance, Ronald Reagan, The Chicago School, The Wisdom of Crowds, transaction costs, union organizing, Walter Mischel, Yom Kippur War

An example could be: 84% chance to win: A dozen red roses in a glass vase. Value $59. 21% chance to win: A dozen red roses in a glass vase. Value $59. It is easy to assess the expected monetary value of these gambles, but adding a specific monetary value did not alter the results: evaluations remained insensitive to probability even in that condition. People who thought of the gift as a chance to get roses did not use price information as an anchor in evaluating the gamble. As scientists sometimes say, this is a surprising finding that is trying to tell us something. What story is it trying to tell us? The story, I believe, is that a rich and vivid representation of the outcome, whether or not it is emotional, reduces the role of probability in the evaluation of an uncertain prospect. This hypothesis suggests a prediction, in which I have reasonably high confidence: adding irrelevant but vivid details to a monetary outcome also disrupts calculation.

Jacowitz and Daniel Kahneman, “Measures of Anchoring in Estimation Tasks,” Person {pantion ality and Social Psychology Bulletin 21 (1995): 1161–66. substantially lower: Gregory B. Northcraft and Margaret A. Neale, “Experts, Amateurs, and Real Estate: An Anchoring-and-Adjustment Perspective on Property Pricing Decisions,” Organizational Behavior and Human Decision Processes 39 (1987): 84–97. The high anchor was 12% above the listed price, the low anchor was 12% below that price. rolled a pair of dice: Birte Englich, Thomas Mussweiler, and Fritz Strack, “Playing Dice with Criminal Sentences: The Influence of Irrelevant Anchors on Experts’ Judicial Decision Making,” Personality and Social Psychology Bulletin 32 (2006): 188–200. NO LIMIT PER PERSON: Brian Wansink, Robert J. Kent, and Stephen J. Hoch, “An Anchoring and Adjustment Model of Purchase Quantity Decisions,” Journal of Marketing Research 35 (1998): 71–81.

positive test strategy possibility effect: gambles and; threats and post-traumatic stress poverty precautionary principle predictability, insensitivity to predictions and forecasts; baseline; clinical vs. statistical; disciplining; of experts, see expert intuition; extreme, value of; formulas for, see formulas; increasing accuracy in; low-validity environments and; nonregressive; objections to moderating; optimistic bias in; outside view in; overconfidence in; planning fallacy and; short-term trends and; valid, illusion of; see also probability preference reversals; unjust premonition, use of word premortem pretentiousness language pricing policies priming; anchoring as t="-5%"> Princeton University probability; base rates in, see base rates; decision weights and, see decision weights; definitions of; and disciplining intuition; less-is-more pattern and; Linda problem and; overestimation of; plausibility and; and predicting by representativeness; prior, insensitivity to; professional stereotypes and; of rare events, see rare events; representativeness and, see representativeness; similarity and; subjective; as sum-like variable; see also predictions and forecasts probability neglect Proceedings of the National Academy of Sciences professional stereotypes professorial candidates prospect theory; in Albert and Ben problem; blind spots of; cumulative; decision weights and probabilities in; fourfold pattern in; frames and; graph of losses and gains in; loss aversion in; reference points in “Prospect Theory: An Analysis of Decision Under Risk” (Kahneman and Tversky) prototypes psychiatric patients psychological immune system psychology, teaching psychopathic charm psychophysics psychotherapists pundits; see also expert intuition punishments: altruistic; rewards and; self-administered pupil dilation questionnaire and gift experiments questions; substitution of, see substitution Rabin, Matthew radiologists rafters, skilled rail projects randomness and chance; misconceptions of Random Walk Down Wall Street, A (Malkiel) rare events; overestimation of; regret and rational-agent model rationality Rationality and the Reflective Mind (Stanovich) ">rats Reagan, Ronald reciprocal priming recognition recognition-primed decision (RPD) model Redelmeier, Don reference class forecasting regression to the mean; causal interpretations and; correlation and; difficulty in grasping; two-systems view of “Regression towards Mediocrity in Hereditary Stature” (Galton) regret religion remembering self Remote Association Test (RAT) reorganizations in companies repetition representativeness; base rates and; see also base rates; in Linda problem; predicting by; professional stereotypes and; sins of; in Tom W problem research: artifacts in; hypothesis testing in; optimism in resemblance; in predictions resilience responsibility retrievability of instances reversals; unjust rewards; self-administered Rice, Condoleezza risk assessment; aggregation and; broad framing in; decision weights in, see decision weights; denominator neglect and; by experts; and format of risk expression; fourfold pattern in; for health risks; hindsight bias and; laws and regulations governing; loss aversion in; narrow framing in; optimistic bias and; policies for; possibility effect and; precautionary principle and; probability neglect and; public policies and; small risks and; of technologies; terrorism and; see also gambles risk aversion risk seeking “Robust Beauty of Improper Linear Models in Decision Making, The” (Dawes) Rosett, Richard Rosenzweig, Philip Royal Dutch Shell Royal Institution Rozin, Paul < Philip Rumsfeld, Donald Russell Sage Foundation Russia Saddam Hussein sadness safety; health risks and; health violation penalties and; precautionary principle and samples, sampling: accidents of; and bias of confidence over doubt; law of large numbers; law of small numbers; size of; small, exaggerated faith in Samuelson, Paul San Francisco Exploratorium Savage, Jimmie Save More Tomorrow Schelling, Thomas Schkade, David school size Schwarz, Norbert Schweitzer, Maurice Science Scientific American scientific controversies scientific research: artifacts in; hypothesis testing in; optimism in Scottish Parliament self-control self-criticism Seligman, Martin selves; experiencing; remembering sets Shafir, Eldar similarity judgments Simmel, Mary-Ann Simon, Herbert Simons, Daniel Simpson, O.


pages: 248 words: 72,174

pages: 241 words: 75,516

The Paradox of Choice: Why More Is Less by Barry Schwartz

Amazon: amazon.comamazon.co.ukamazon.deamazon.fr

accounting loophole / creative accounting, attribution theory, Atul Gawande, availability heuristic, Cass Sunstein, Daniel Kahneman / Amos Tversky, endowment effect, framing effect, income per capita, job satisfaction, loss aversion, medical residency, mental accounting, Own Your Own Home, positional goods, price anchoring, psychological pricing, RAND corporation, Richard Thaler, science of happiness, The Wealth of Nations by Adam Smith

Sometime later, the catalog began to offer a larger capacity, deluxe version for $429. They didn’t sell too many of these expensive bread makers, but sales of the less expensive one almost doubled! With the expensive bread maker serving as an anchor, the $279 machine had become a bargain. Anchoring is why department stores seem to have some of their merchandise on sale most of the time, to give the impression that customers are getting a bargain. The original ticket price becomes an anchor against which the sale price is compared. A more finely tuned example of the importance of the context of comparison comes from a study of supermarket shoppers done in the 1970s, shortly after unit-pricing started appearing on the shelves just beneath the various items. When unit price information appeared on shelf tags, shoppers saved an average of 1 percent on their grocery bills. They did so mostly by purchasing the larger-sized packages of whatever brand they bought.


pages: 294 words: 82,438

Simple Rules: How to Thrive in a Complex World by Donald Sull, Kathleen M. Eisenhardt

Amazon: amazon.comamazon.co.ukamazon.deamazon.fr

Affordable Care Act / Obamacare, Airbnb, asset allocation, Atul Gawande, barriers to entry, Basel III, Berlin Wall, carbon footprint, Checklist Manifesto, complexity theory, Craig Reynolds: boids flock, Credit Default Swap, Daniel Kahneman / Amos Tversky, diversification, en.wikipedia.org, European colonialism, Exxon Valdez, facts on the ground, Fall of the Berlin Wall, haute cuisine, invention of the printing press, Isaac Newton, Kickstarter, late fees, Lean Startup, Louis Pasteur, Lyft, Moneyball by Michael Lewis explains big data, Nate Silver, Network effects, obamacare, Paul Graham, performance metric, price anchoring, RAND corporation, risk/return, Saturday Night Live, sharing economy, Silicon Valley, Startup school, statistical model, Steve Jobs, TaskRabbit, The Signal and the Noise by Nate Silver, transportation-network company, two-sided market, Wall-E, web application, Y Combinator, Zipcar

The field of strategy is based on a precise point of view of what a company’s ultimate objective should be—to create economic value over time and capture it as profits. Economic value is defined as the difference between what a customer is willing to pay for a product and the cost of all the inputs required to produce it. Willingness to pay works better than alternative measures, such as revenues or price, because it anchors the analysis in the customer’s point of view and forces managers to consider what customers value and what alternatives they have. If a company succeeds in generating economic value (and protecting it from competitors), it will generate profits and cash flow into the future—the ultimate goal of a company’s strategy. Other measures of success, such as market share, revenue growth, and customer satisfaction, serve as useful markers along the road to profitable growth.


pages: 97 words: 28,524

pages: 393 words: 115,263

Planet Ponzi by Mitch Feierstein

Amazon: amazon.comamazon.co.ukamazon.deamazon.fr

Affordable Care Act / Obamacare, Albert Einstein, Asian financial crisis, asset-backed security, bank run, banking crisis, barriers to entry, Bernie Madoff, centre right, collapse of Lehman Brothers, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, disintermediation, diversification, Donald Trump, energy security, eurozone crisis, financial innovation, financial intermediation, Flash crash, floating exchange rates, frictionless, frictionless market, high net worth, High speed trading, illegal immigration, income inequality, interest rate swap, invention of agriculture, Long Term Capital Management, moral hazard, mortgage debt, Northern Rock, obamacare, offshore financial centre, oil shock, pensions crisis, Plutocrats, plutocrats, Ponzi scheme, price anchoring, price stability, purchasing power parity, quantitative easing, risk tolerance, Robert Shiller, Robert Shiller, Ronald Reagan, too big to fail, trickle-down economics, value at risk, yield curve

It’s a heck of a lot harder for a central bank to destroy the value of gold. If you review the graphs presented in chapter 13, ‘A brief flash of reality,’ you’ll see why I like it so much. In times of grotesque debt accumulation and asset destruction, gold is the one investment buddy you can really trust. I have plenty of gold in my current portfolio and I can’t see that changing while conditions remain as uncertain as they are. Having said that, the price of gold isn’t anchored by interest rates or dividend payments, or any of the other things which normally anchor the price of a security or physical commodity. That makes the gold price more than normally susceptible to swings of sentiment. So if you like gold, then buy carefully. Buy on the dips. Don’t get suckered into buying when the gold is on one of its periodic upsurges. And don’t, of course, be stupid enough to plunge all your assets into gold.


pages: 385 words: 128,358

Inside the House of Money: Top Hedge Fund Traders on Profiting in a Global Market by Steven Drobny

Amazon: amazon.comamazon.co.ukamazon.deamazon.fr

Albert Einstein, asset allocation, Berlin Wall, Bonfire of the Vanities, Bretton Woods, buy low sell high, capital controls, central bank independence, Chance favours the prepared mind, commodity trading advisor, corporate governance, correlation coefficient, Credit Default Swap, diversification, diversified portfolio, family office, fixed income, glass ceiling, high batting average, implied volatility, index fund, inflation targeting, interest rate derivative, inventory management, Long Term Capital Management, margin call, market bubble, Maui Hawaii, Mexican peso crisis / tequila crisis, moral hazard, new economy, Nick Leeson, oil shale / tar sands, oil shock, out of africa, paper trading, Peter Thiel, price anchoring, purchasing power parity, reserve currency, risk tolerance, risk-adjusted returns, risk/return, rolodex, Sharpe ratio, short selling, Silicon Valley, The Wisdom of Crowds, too big to fail, transaction costs, value at risk, yield curve, zero-coupon bond

It has brought inflation expectations right down to the target and that has had a lot of beneficial effects. In the old days, when oil prices went up, there was always a risk that you needed to tighten policy to ensure that inflation didn’t get out of hand. Now we’ve had two significant oil shocks since the Bank of England has been independent, and in neither case did they have to tighten policy, because wages and prices were well anchored by subdued inflation expectations.That’s a good outcome. There are other benefits from the reduction of inflation volatility, such as businesses being more willing to invest, and you don’t get unfair redistribution because of unexpected inflation. Likewise, the Treasury is no longer worrying that much about macromanagement and macrostability, so it can concentrate on other policies designed to help the long-term growth rate of the UK economy.

Stocks for the Long Run, 4th Edition: The Definitive Guide to Financial Market Returns & Long Term Investment Strategies by Jeremy J. Siegel

Amazon: amazon.comamazon.co.ukamazon.deamazon.fr

asset allocation, backtesting, Black-Scholes formula, Bretton Woods, buy low sell high, California gold rush, capital asset pricing model, cognitive dissonance, compound rate of return, correlation coefficient, Daniel Kahneman / Amos Tversky, diversification, diversified portfolio, dividend-yielding stocks, equity premium, Eugene Fama: efficient market hypothesis, fixed income, German hyperinflation, implied volatility, index arbitrage, index fund, Isaac Newton, joint-stock company, Long Term Capital Management, loss aversion, market bubble, mental accounting, new economy, oil shock, passive investing, prediction markets, price anchoring, price stability, purchasing power parity, random walk, Richard Thaler, risk tolerance, risk/return, Robert Shiller, Robert Shiller, Ronald Reagan, shareholder value, short selling, South Sea Bubble, technology bubble, The Great Moderation, The Wisdom of Crowds, transaction costs, tulip mania, Vanguard fund

You thought that a price of 40 for a stock that had been 80 made the stock cheap, yet you never considered the possibility that 40 was still too high. This demonstrates another one of Kahneman and Tversky’s behavioral findings: anchoring, or the tendency of people facing complex decisions to use an “anchor” or a suggested number to form their judgment.22 Figuring out the “correct” stock price is such a complex task that it is natural to use the recently remembered stock price as an anchor and then judge the current price a bargain. Dave: If I follow your advice and sell my losers whenever prospects are dim, I’m going to register a lot more losses on my trades. IC: Good! Most investors do exactly the opposite and realize poor returns. Research has shown that investors sell stocks for a gain 50 percent more frequently than they sell stocks for a loss.23 This means that stocks that are above their purchase price are 50 percent more likely to be sold than stocks that show a loss.


pages: 387 words: 110,820

pages: 270 words: 64,235

pages: 310 words: 82,592

Never Split the Difference: Negotiating as if Your Life Depended on It by Chris Voss, Tahl Raz

Amazon: amazon.comamazon.co.ukamazon.deamazon.fr

banking crisis, Black Swan, clean water, cognitive bias, Daniel Kahneman / Amos Tversky, Donald Trump, framing effect, friendly fire, iterative process, loss aversion, market fundamentalism, price anchoring, telemarketer, ultimatum game, uranium enrichment

It gives the number credibility and weight. 6.On your final number, throw in a nonmonetary item (that they probably don’t want) to show you’re at your limit. The genius of this system is that it incorporates the psychological tactics we’ve discussed—reciprocity, extreme anchors, loss aversion, and so on—without you needing to think about them. If you’ll bear with me for a moment, I’ll go over the steps so you see what I mean. First, the original offer of 65 percent of your target price will set an extreme anchor, a big slap in the face that might bring your counterpart right to their price limit. The shock of an extreme anchor will induce a fight-or-flight reaction in all but the most experienced negotiators, limiting their cognitive abilities and pushing them into rash action. Now look at the progressive offer increases to 85, 95, and 100 percent of the target price. You’re going to drop these in sparingly: after the counterpart has made another offer on their end, and after you’ve thrown out a few calibrated questions to see if you can bait them into bidding against themselves.


pages: 276 words: 82,603

Birth of the Euro by Otmar Issing

Amazon: amazon.comamazon.co.ukamazon.deamazon.fr

accounting loophole / creative accounting, Bretton Woods, business climate, capital controls, central bank independence, currency peg, financial innovation, floating exchange rates, full employment, inflation targeting, labour market flexibility, labour mobility, market fundamentalism, moral hazard, oil shock, open economy, price anchoring, price stability, purchasing power parity, reserve currency, Y2K, yield curve

Tinbergen, On the Theory of Economic Policy, 2nd edition (Amsterdam, 1952). 66 • The ECB and the foundations of monetary policy instead. On account of the loss of credibility, the interest rate level across periods is higher than with a constant monetary policy aimed solely at maintaining price stability. In the end, therefore, an inflationary monetary policy does not add up, and on balance society is worse off. Thus the long-run maintenance of price stability and correspondingly well-anchored inflation expectations are not only the best, but also the only way in which monetary policy can contribute to growth and employment over time. If the central bank deviates from this course, not only will it fail to make a positive contribution to achieving the ‘other objectives’, but – quite the reverse – it will also fail to fulfil its actual mandate.19 The above reflects current knowledge at the time the consultations and negotiations on the Statute of a European Central Bank got under way.


pages: 391 words: 22,799

To Serve God and Wal-Mart: The Making of Christian Free Enterprise by Bethany Moreton

Amazon: amazon.comamazon.co.ukamazon.deamazon.fr

affirmative action, anti-communist, Berlin Wall, big-box store, Bretton Woods, Buckminster Fuller, collective bargaining, corporate personhood, deindustrialization, desegregation, Donald Trump, estate planning, Fall of the Berlin Wall, Frederick Winslow Taylor, George Gilder, global village, informal economy, invisible hand, market fundamentalism, Mont Pelerin Society, mortgage tax deduction, Naomi Klein, new economy, New Urbanism, post-industrial society, postindustrial economy, prediction markets, price anchoring, Ralph Nader, RFID, road to serfdom, Ronald Reagan, Silicon Valley, Stewart Brand, strikebreaker, The Wealth of Nations by Adam Smith, union organizing, walkable city, Washington Consensus, white flight, Whole Earth Catalog, Works Progress Administration

Arkansas, Wal-Â�Mart’s home state, passed one of the first “right-Â�to-Â�work” laws in 1947; by 1954, the entire South had enacted such legislation.11 When it came time to select sites for military bases and war contracts, the conservative conÂ�gresÂ�sional coalition made its power felt as well. Jesse H. Jones’s lieutenant at the Reconstruction Finance Corporation—a zealous supporter of the free market from Houston—shaped the postwar sell-Â�off of federal assets to private companies at bargain-Â�basement prices.12 This infrastructure anchored the Sun Belt’s dominance of the high-Â�tech “clean development” of the Cold War—NASA in Texas and Florida; Hughes Aircraft in Orange County, California; Lockheed-Â� Martin in Cobb County, Georgia; the Air Force Academy in Colorado Springs. The Cold War defense industry and its single guaranteed client, the federal government, provided a reliable mechanism for redistributing national wealth to the South and West.13 These high-Â�tech industries in turn supported a secondary sector of serÂ�vice, entertainment, and recreation: McDonald’s and Disney from California; the retirement industry in Florida, Arkansas, and Arizona; Blockbuster Video from Dallas; the country-Â�music industry in Nashville and Branson; and, of course, Wal-Â�Mart in Bentonville, discount commissary to the Sun Belt boom economy.


pages: 471 words: 124,585

The Ascent of Money: A Financial History of the World by Niall Ferguson

Amazon: amazon.comamazon.co.ukamazon.deamazon.fr

Admiral Zheng, Andrei Shleifer, Asian financial crisis, asset allocation, asset-backed security, Atahualpa, bank run, banking crisis, banks create money, Black Swan, Black-Scholes formula, Bonfire of the Vanities, Bretton Woods, BRICs, British Empire, capital asset pricing model, capital controls, Carmen Reinhart, Cass Sunstein, central bank independence, collateralized debt obligation, colonial exploitation, Corn Laws, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, Daniel Kahneman / Amos Tversky, deglobalization, diversification, diversified portfolio, double entry bookkeeping, Edmond Halley, Edward Glaeser, Edward Lloyd's coffeehouse, financial innovation, financial intermediation, fixed income, floating exchange rates, Fractional reserve banking, Francisco Pizarro, full employment, German hyperinflation, Hernando de Soto, high net worth, hindsight bias, Home mortgage interest deduction, Hyman Minsky, income inequality, interest rate swap, Isaac Newton, iterative process, joint-stock company, joint-stock limited liability company, Joseph Schumpeter, Kenneth Rogoff, knowledge economy, labour mobility, London Interbank Offered Rate, Long Term Capital Management, market bubble, market fundamentalism, means of production, Mikhail Gorbachev, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, mortgage tax deduction, Naomi Klein, Nick Leeson, Northern Rock, pension reform, price anchoring, price stability, principal–agent problem, probability theory / Blaise Pascal / Pierre de Fermat, profit motive, quantitative hedge fund, RAND corporation, random walk, rent control, rent-seeking, reserve currency, Richard Thaler, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, seigniorage, short selling, Silicon Valley, South Sea Bubble, sovereign wealth fund, spice trade, structural adjustment programs, technology bubble, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Thomas Malthus, Thorstein Veblen, too big to fail, transaction costs, value at risk, Washington Consensus, Yom Kippur War

It was not until 1993, after the Savings and Loans crisis (see Chapter 5), that the number of national banks fell below 3,600 for the first time in nearly a century. In 1924 John Maynard Keynes famously dismissed the gold standard as a ‘barbarous relic’. But the liberation of bank-created money from a precious metal anchor happened slowly. The gold standard had its advantages, no doubt. Exchange rate stability made for predictable pricing in trade and reduced transaction costs, while the long-run stability of prices acted as an anchor for inflation expectations. Being on gold may also have reduced the costs of borrowing by committing governments to pursue prudent fiscal and monetary policies. The difficulty of pegging currencies to a single commodity based standard, or indeed to one another, is that policymakers are then forced to choose between free capital movements and an independent national monetary policy. They cannot have both.


pages: 625 words: 167,097

pages: 741 words: 179,454

Extreme Money: Masters of the Universe and the Cult of Risk by Satyajit Das

Amazon: amazon.comamazon.co.ukamazon.deamazon.fr

affirmative action, Albert Einstein, algorithmic trading, Andy Kessler, Asian financial crisis, asset allocation, asset-backed security, bank run, banking crisis, banks create money, Basel III, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, Black Swan, Bonfire of the Vanities, bonus culture, Bretton Woods, BRICs, British Empire, capital asset pricing model, Carmen Reinhart, carried interest, Celtic Tiger, clean water, cognitive dissonance, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, debt deflation, Deng Xiaoping, deskilling, discrete time, diversification, diversified portfolio, Doomsday Clock, Emanuel Derman, en.wikipedia.org, Eugene Fama: efficient market hypothesis, eurozone crisis, Fall of the Berlin Wall, financial independence, financial innovation, fixed income, full employment, global reserve currency, Goldman Sachs: Vampire Squid, Gordon Gekko, greed is good, happiness index / gross national happiness, haute cuisine, high net worth, Hyman Minsky, index fund, interest rate swap, invention of the wheel, invisible hand, Isaac Newton, job automation, Johann Wolfgang von Goethe, joint-stock company, Joseph Schumpeter, Kenneth Rogoff, Kevin Kelly, labour market flexibility, laissez-faire capitalism, load shedding, locking in a profit, Long Term Capital Management, Louis Bachelier, margin call, market bubble, market fundamentalism, Marshall McLuhan, Martin Wolf, merger arbitrage, Mikhail Gorbachev, Milgram experiment, Mont Pelerin Society, moral hazard, mortgage debt, mortgage tax deduction, mutually assured destruction, Naomi Klein, Network effects, new economy, Nick Leeson, Nixon shock, Northern Rock, nuclear winter, oil shock, Own Your Own Home, pets.com, Plutocrats, plutocrats, Ponzi scheme, price anchoring, price stability, profit maximization, quantitative easing, quantitative trading / quantitative finance, Ralph Nader, RAND corporation, random walk, Ray Kurzweil, regulatory arbitrage, rent control, rent-seeking, reserve currency, Richard Feynman, Richard Feynman, Richard Thaler, risk-adjusted returns, risk/return, road to serfdom, Robert Shiller, Robert Shiller, Rod Stewart played at Stephen Schwarzman birthday party, rolodex, Ronald Reagan, Ronald Reagan: Tear down this wall, savings glut, shareholder value, Sharpe ratio, short selling, Silicon Valley, six sigma, Slavoj Žižek, South Sea Bubble, special economic zone, statistical model, Stephen Hawking, Steve Jobs, The Chicago School, The Great Moderation, the market place, the medium is the message, The Myth of the Rational Market, The Nature of the Firm, The Predators' Ball, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, trickle-down economics, Turing test, Upton Sinclair, value at risk, Yogi Berra, zero-coupon bond

As the supply of CDS contracts was not restricted by the amount of Greek debt, hedge funds and other rubber-necked financial accident voyeurs joined the party, looking to make profits. Dealers in CDSs made large spreads from standing in between the buyers and sellers. As with all insurance, higher risks mean higher premiums. The CDS markets became a visible benchmark of Greece’s problems. The price of insurance was not anchored to the real underlying risk or the public finances of Greece. Traders were not interested in whether Greece was likely to default or in protecting themselves from this risk. They just kept beating the Greek piñata. Traders pushed around the thinly traded insurance contracts, making money from the volatility. Price movements triggered collateral requirements, causing further problems.


pages: 892 words: 91,000

Valuation: Measuring and Managing the Value of Companies by Tim Koller, McKinsey, Company Inc., Marc Goedhart, David Wessels, Barbara Schwimmer, Franziska Manoury

Amazon: amazon.comamazon.co.ukamazon.deamazon.fr

air freight, barriers to entry, Basel III, BRICs, business climate, business process, capital asset pricing model, capital controls, cloud computing, compound rate of return, conceptual framework, corporate governance, corporate social responsibility, credit crunch, Credit Default Swap, discounted cash flows, distributed generation, diversified portfolio, energy security, equity premium, index fund, iterative process, Long Term Capital Management, market bubble, market friction, meta analysis, meta-analysis, new economy, p-value, performance metric, Ponzi scheme, price anchoring, purchasing power parity, quantitative easing, risk/return, Robert Shiller, Robert Shiller, shareholder value, six sigma, sovereign wealth fund, speech recognition, technology bubble, time value of money, too big to fail, transaction costs, transfer pricing, value at risk, yield curve, zero-coupon bond

It shows that the DCF value is far less volatile than the underlying cash flow, because no single year’s performance has a significant impact on the value of the company. In the real world, the share prices of cyclical companies are less stable than the example in exhibit 33.1. Exhibit 33.2 shows the earnings per share (EPS) and share prices, both indexed, for 15 companies with a four-year cycle. The share prices are more volatile than the DCF approach would predict—suggesting that market prices exhibit the bias of anchoring on current earnings. How can this apparent anomaly be explained? We examined equity analysts’ consensus earnings forecasts for cyclical companies to see if they would provide any clues to the volatile stock prices of these companies. What we found surprised us. Consensus earnings forecasts for cyclical companies appeared to ignore cyclicality entirely. The forecasts invariably showed an upward-sloping trend, whether the companies were at the peak or trough of the cycle.