This anchoring bias impacts many financial decisions. For example, the awards from lawsuits are influenced by the plaintiff's initial demand—the plaintiff gets more if he or she requested more. In real estate, people are unconsciously influenced by arbitrary posted prices. In online auctions, the prices bid are anchored by the non-binding "buy-now price." And earnings forecasts by financial analysts are biased towards the previous months' data as an anchor. Issuers of initial public offerings anchor to the midpoint of the initially filed pricing range. This may cause them to become complacent about assessing the new information gathered in the ‘going public' process and thus may contribute to the underpricing of IPOs.
When formulating a financial decision, prediction, or guess, you have to start somewhere. The initial price or number you pick turns out to have enormous influence on your final conclusion. That is, you anchor to this initial price and make adjustments from there. These adjustments are frequently inadequate. Such biased results in forecasts underweight new information and can thus give rise to predictable, and yet surprising, forecast errors.