Wanted to get everyone’s take on the different between Anchoring Bias and Representation Bias. To me in basically they are the exact same thing, making estimates based on their views. Can anyone point to any specifics where one is more appropriate than another outside of a direct questions alluding to a small sample size?
Say a question regards analyst taking a view on a stock where last the performance has been good the last few years, but recently the company reported a decline in earnings growth which has been a trend in the sector. As a result the analyst revises his earnings estimates down for the stock.
Is the analyst subject to Representation Bias or Anchoring Bias here?
This was from FinQuiz 2016 AM Mock 4 Revision 1 for refernce.
Anchoring & Adjustments = more similar to Conservativeness with the only difference in fact that individual anchored the opinion on first initial judgment (change) and missed to consider other facts.
I’ d say in example above, the anchoring bias may be the case rather than representativeness.
Thanks that what I thought too. But the FinQuiz said it was Representation Bias.
FinQuiz sometimes is a little off, the mocks seem like they are much more tricky.
Answer they provided -
He is ignoring the base rate information of an above average earnings growth rate for company for so many years and is assuming that the small sample of firms that reported losses is representative of all firms in the industry. Hence, he is guilty of both base-rate neglect and sample-size neglect.
I think if it were anchoring the question would have to say:
An analyst estimates EPS @ $2/share. 1 year later the company reports 50% drop in sales. The analyst revises his estimate from $2 to $1.75
The actual estimate could be $.50 but he based his next estimate off his original. Anchoring the drop.
From the book:
Representativeness:
Adopt a view based almost exclusively on new information or small sample size
Update beliefs using simple classifications, rather than deal with the stress of updating beliefs. If an investor purchases a security based on the belief that the company is entering a period of significant earnings growth, and then the company announces that its growth rate may appear lower than expected because of a number of difficult-to-interpret accounting changes, the investor may simply reclassify the stock rather than attempt to decipher the fundamental impact. As a result, the investor may sell the security when fundamentals would not justify such a decision.