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Towards a Rational Explanation for Anchoring

7 Pages Posted: 3 Jan 2018 Last revised: 19 Jan 2018

Leon Yang Chu

University of Southern California - Marshall school of Business

Date Written: December 29, 2017

Abstract

Built upon statistics insights, we illustrate that Bayesian decision theory combined with a non-informative prior may lead to a strictly dominated decision rule, which can be improved by shrinking the decision towards an arbitrary-chosen reference point. By doing so, one incurs a bias but reduces the variance of the decision and decreases the expected loss. This revelation suggests that anchoring may have a rational explanation. The examination of the known features of the anchoring effect provides additional support to this view.

Keywords: Anchoring effect; Decision theory; James-Stein Shrinkage

JEL Classification: D03; D81

Suggested Citation

Chu, Leon Yang, Towards a Rational Explanation for Anchoring (December 29, 2017). Available at SSRN: https://ssrn.com/abstract=3094490

Leon Yang Chu (Contact Author)

University of Southern California - Marshall school of Business ( email )

Marshall School of Business
BRI 401, 3670 Trousdale Parkway
Los Angeles, CA 90089
United States

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