Which cognitive bias involves excessively relying on initial information?

The cognitive bias that involves excessively relying on initial information is known as anchoring. This bias occurs when individuals base their decisions or judgments on the first piece of information they encounter, which acts as a reference point. For example, if investors hear that a stock is initially priced at $50, they may perceive future price movements based on that figure, regardless of other relevant data. This can lead to skewed perceptions of value and risk, as investors might ignore new information that contradicts the initial anchor.

In financial contexts, anchoring can manifest in various ways, such as price targets affected by prior prices or earnings estimates that are tethered to earlier reports. The tendency to anchor can hinder analytical decision-making as it can cause one to underweight important new information, leading to potentially suboptimal investment choices.

Understanding the anchoring bias is crucial for market technicians, as recognizing how initial information influences decision-making helps in assessing behavior in the market and making more informed trading decisions.