Anchoring Bias

In the past, we have covered some of the biases we generally experience in our day to day lifestyle. Here is one more today.

When you google or search on amazon to buy a TV set you look at the price tag and see it as only ₹ 49,999. After a week later, you come across the same TV with a flat 10% discount especially for you. You might happily take that offer, well you are saving net 10%. Here comes the anchoring bias. We are hooked to the initial information. We never think of the actual cost of the goods. We assume the M.R.P. as the accurate selling price. If we think of the actual good cost of the TV it may be actually less than ₹ 19,999. Ironically, we are just happy saving the 10%. Buy one get one free, be it a pizza or a t-shirt, effectively we pay more than double price on a normal day without the offers.

Let’s see the anchoring impact on investing. Suppose you are willing to buy Tesla’s stock, after all it is the most valued automaker. Generally we start to compare its future price based on today’s pricing. Instead of taking into consideration that it may be already highly priced and making our analysis accordingly. But since we are focused into initial information we got stick today’s price.

We anchor high value to printed price or the current trading price instead of the fair value.

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Sometimes due to this anchor it is hard to sell the poorly forming stocks in the portfolio after all we are anticipating the value to rise instead of focusing on the fundamentals.

Similarly, in other areas too we form first impression. After all we judge the book just by the cover. After all it is the first information at hand.

Being aware of the bias is the first step to nullify its compounding effects in the long run.

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