Confounding changes in averages with marginal effects: How anchoring can destroy economic value in strategic investment assessments
Article first published online: 14 AUG 2013
Copyright © 2013 John Wiley & Sons, Ltd.
Strategic Management Journal
Volume 35, Issue 10, pages 1414–1426, October 2014
How to Cite
Shapira, Z. and Shaver, J. M. (2014), Confounding changes in averages with marginal effects: How anchoring can destroy economic value in strategic investment assessments. Strat. Mgmt. J., 35: 1414–1426. doi: 10.1002/smj.2165
- Issue published online: 27 AUG 2014
- Article first published online: 14 AUG 2013
- Accepted manuscript online: 26 JUN 2013 01:16PM EST
- Manuscript Accepted: 18 JUN 2013
- Manuscript Revised: 18 DEC 2012
- Manuscript Received: 18 JAN 2012
- decision making;
- profit maximization
Profit maximization requires that decision makers assess marginal profits. We demonstrate that decision makers often confound marginal profits with changes in average profits (e.g., changes in return-on-investment). This results in systematic deviations from profit maximization where decision makers forgo profit-enhancing investments that reduce average profits or engage in loss-enhancing investments that decrease average losses. In other words, average profit becomes an anchor by which new investments are assessed. We conduct two decision-making experiments that show this bias and demonstrate it is pronounced when average profit data are accessible or task-relevant. Moreover, we find within-subject effects across experiments, which helps demonstrate the mechanism that invokes the bias. Copyright © 2013 John Wiley & Sons, Ltd.