New Years Resolutions & Anchoring Bias:
Introduction
As New Year’s approaches, it is common for people to set goals and New Years resolutions which they work towards throughout the year to achieve and better themselves. However, unrealistic targets are often set and financial goals are not exempted from this mistake.
Just as the name suggests, a new year is a sign to leave the old year behind and look forward. Although statistics and figures from previous years cannot be completely ignored, it is not financially healthy for one to completely linger on these figures and base your financial expectations on “anchors”
What is Anchoring Bias?
Anchoring Bias is the cognitive bias that causes us to rely too heavily on the first piece of information we receive instead of evaluating all available information.
Case Study: Anchoring Bias in Inflation Rates And Economic Confidence
Singapore Scenario
In 2022, Inflation expectations fell to 5.5% in June, down from 5.7% in March. Headline inflation expectations for the year ahead also decreased to 3.9% from 4.1% in the previous quarter, though these are still above the historical average.
The report notes that despite ongoing global uncertainties and economic disruptions, Singaporeans anticipate a moderately negative impact on economic growth due to the pandemic. Transportation inflation expectations dropped from 9% to 8%, while expectations for other components remained stable. Researchers attribute the elevated inflation expectations to cognitive biases, such as “anchoring bias,” though financial literacy among respondents helps reduce this effect.
While inflation expectations have decreased, concerns about economic stability and inflation remain significant, influenced by global factors such as the ongoing conflict in Ukraine. The Monetary Authority of Singapore’s measures to control inflation are also noted, with a focus on keeping expectations anchored in the long term.
Key Takeaways: This study demonstrates that Singaporeans are prone to make quick assumptions about inflation rates and how the economy is going to perform due to media suggesting a global economic slowdown which does not necessarily align with Singapore’s stabilization policies
Risk Management Strategies
1. Establish clear, holistic goals
- It is important to establish clear and holistic goals when it comes to finances based on previous performance. This indicates that goals should be formed based on a variety of factors and overall financial health which is set to be accomplished. Anchoring bias often leads people to fixate on one aspect, such as an arbitrary financial target or last year’s performance, without assessing their broader financial picture. By setting goals based on a variety of factors—such as past performance, income changes, and overall financial health—you’re less likely to anchor to one piece of information, allowing for more balanced and achievable resolutions. This comprehensive approach ensures that the goals are realistic, sustainable, and aligned with long-term financial well-being.
2. Keep up with concurrent events and new actively
- Staying informed on concurrent events and maintaining an active engagement with new developments is crucial for gaining a holistic understanding of economic sentiment. Allocating dedicated time each day to follow the news or relevant updates ensures you remain current and knowledgeable without relying too heavily to the first information you see or one statistic.
3. Use a variety of sources before making a conclusion
- Using a variety of sources before drawing conclusions is essential for avoiding anchoring bias and ensuring a well-rounded perspective. By consulting multiple viewpoints, whether through news outlets, academic research, or discussions with others, you can formulate a more accurate expectation of economic conditions to accomplish your financial goals. This prevents reliance on limited or skewed information.
Additional Resources
Research on Social Media Influence
Additional Resources
Articles & Studies: