Detecting anchoring in financial markets

TL;DR

This paper investigates the role of anchoring bias in financial markets using a biologically inspired trading algorithm, providing exact solutions and extending it to market-neutral portfolios to reveal anchoring's influence on decision making.

Contribution

It introduces a novel application of a biological motor-inspired algorithm to detect anchoring effects in financial trading, including exact solutions and market-neutral extensions.

Findings

Anchoring influences trading decisions in financial markets.

The algorithm reveals arbitrage opportunities linked to anchoring.

Market efficiency assessments are complicated by anchoring effects.

Abstract

Anchoring is a term used in psychology to describe the common human tendency to rely too heavily (anchor) on one piece of information when making decisions. A trading algorithm inspired by biological motors, introduced by L. Gil\cite{Gil}, is suggested as a testing ground for anchoring in financial markets. An exact solution of the algorithm is presented for arbitrary price distributions. Furthermore the algorithm is extended to cover the case of a market neutral portfolio, revealing additional evidence that anchoring is involved in the decision making of market participants. The exposure of arbitrage possibilities created by anchoring gives yet another illustration on the difficulty proving market efficiency by only considering lower order correlations in past price time series