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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.
