Question

What is anchoring bias? What is herding behavior? How can these contribute to market bubbles? Research the performance of the S&P 500 over the past 6 months. Do you think that any of these biases might be contributing to a market bubble? Why or Why not?

Answer 1

Investors with an anchoring bias tend to hold investments that have fallen in value because they have anchored their fair value estimate to the original price rather than to fundamentals. As a result, they assume greater risk by holding the investment in the hope the price of security will go back up to its buying price. In anchoring escalating comparisons are made based on the perceived financial status of other companies which moves generalized thinking notch up and when this bubble bursts the investors are unable to meet their payment schedules.

In herding behaviorr investors mimic the actions of a larger group, irrespective of it being rational or irrational. In many cases, herd behavior is a set of decisions and actions that an investor would not necessarily make on his or her own.the herding behaviour of investors represents a major cause of speculative bubbles as investors are taking similar trading decisions which may lead to deviations of the stocks prices from their fundamental value.

month	return%
december 2018	10.32
january 2018	14.31
february 2018	9.80
march 2018	4.82
april 2018	2.83
may 2018	2.18

if we analyze the data we see there is a rise in return from december to january indicating of hearding behaviour and post january we see the decline indicating the anchoring bias where investors were expecting the price to go back to purchase price , but the decline continued.