On top of the simplification process, people also ignore information: because there is too much of it, because they do not want to acknowledge certain information, or just because they were expecting different information. Even the order in which information is presented can create biases. In a stream of information, the first piece will prime our thinking, and the last will stick in our minds. In addition, contrast is important. If information is homogeneous, nothing stands out,.
but one piece of really different information will be contrasted to the rest. For example, a car dealer might, first, show you a junk heap at a certain price, which you reject, outright. Next, the dealer will show you a newer car at a higher price, and you might buy it, simply because it was so much better than the first car that you were shown, even though the second car is not particularly striking. Studies in marketing have shown that the colors that are used in an advertisement can also affect reaction to the ad.
After the process of the reduction of complexity has been completed, and once other details have been swept under the rug, there remains the necessity of making a decision, quickly, particularly in the continuous auction markets of the investment arena. That decision process begins with an anchor, a reference point, and subsequent adjustment, through the inclusion of additional information or from further analysis. Anchors are normally chosen because of their salience. Analysts will use anchors to produce forecasts, Watch video in link below
video link : http://wp.me/p8HeNU-xe
and, in turn, market participants will be anchored in those forecasts. Anchoring itself is not the problem in this process. After all, analysis needs a starting point. The flaw is in inadequate subsequent adjustment, as a result of putting too much weight on the initial anchor. As a consequence, forecasts based on anchors will underestimate the possible range of outcomes. Relating that back to numbers finance, the range of possible outcomes, the spread, is related to risk, so, risks are underestimated.
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