Anchoring Bias Across Cultures: An Anchoring Bias Comparative Study of the S&P 500 and FTSE 100 on Index Returns

Abstract

This paper intends to study the relationship between anchoring bias and financial markets, specifically global indices, comparing the S&P 500 and FTSE 100. Behavioural economics has the ability to influence financial markets but its effects can be difficult to quantify and measure. Hence, this study analyses the impact of heuristics, anchoring bias for this comparative study, and to what extent it can influence investor sentiment and impact index returns with a direct comparison of indices across time. This furthers on previous academic literature through a direct comparison of a heuristic across global indices in an attempt to explain cultural differences in relation to investor sentiment. Through quantifying anchoring bias through a rolling high and low window spanning 250 trading days across a 15 year period, we find statistically significant results, highlighting a substantial difference in anchoring bias between US and UK investors. Furthering the depth of this analysis, we conduct a sub-analysis of different market conditions and the cumulative abnormal returns of indices to investigate how the magnitude and significance of anchoring bias shifts in different economic conditions.