As humans, each of us have subconscious biases. These biases create blind spots and errors, costing us real cash. Perhaps we cannot completely eliminate our biases but we can work towards recognizing, acknowledging, learning, and ultimately reducing them. If done successfully, we will improve our decision-making and financial results.
Anchoring
Anchoring occurs when investors become fixated on a particular number, such as the price at which they bought into a particular stock or a price target that they hope the stock will reach. Anchoring can prevent an investor from selling out if the fundamentals change for the worse, holding on with dogged determination to try to get back to the breakeven point or from selling out of a currently profitable investment that probably doesn’t have too much further to go, simply because it hasn’t quite reached a particular target price. Anchoring may impose actual losses upon investors due to holding onto a sub-optimal investment for too long or subject them to opportunity costs, as they either don’t realize cash from existing investments that could be rolled into more promising opportunities or they don’t get into promising opportunities in the first place because the price of these opportunities never quite falls to an unrealistically low level that the investor is anchored to.
Potential solution: To avoid anchoring, investors should regularly review any price targets that they have for their investments or potential investments and ask themselves “is this price target reasonable based on rational analysis of the opportunity or am I irrationally anchoring on a particular price based on past experience or unjustified expectations?”
It is important to note that not all investors will be susceptible to exactly the same biases. We are all perfect (and imperfect) in our own special way! You are the best judge to identify which biases have the better of you. Recognize these biases when you are exhibiting them and deliberately make an attempt so they do not cloud your investment judgment.
