Confounding changes in averages with marginal effects: How anchoring can destroy economic value in strategic investment assessments

Zur Shapira, J. Myles Shaver

Research output: Contribution to journalArticle

7 Scopus citations

Abstract

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.

Original languageEnglish (US)
Pages (from-to)1414-1426
Number of pages13
JournalStrategic Management Journal
Volume35
Issue number10
DOIs
StatePublished - Oct 2014

Keywords

  • ROI
  • biases
  • decision making
  • investments
  • profit maximization

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