Towards a Rational Explanation for Anchoring
7 Pages Posted: 3 Jan 2018 Last revised: 19 Jan 2018
Date Written: December 29, 2017
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: Suggested Citation