The anchor – fantastic if you don’t want to float away at sea, but terrible if you drop it when investing.
Anchoring bias is a well documented psychological phenomenon, where a person will become focused on a piece of information, derive unfounded conclusions from it, and then base their future decisions upon it.
Simply, to use a sporting analogy, you could say as the Brisbane Lions finished second last in 2010 so they have no chance to make the eight in 2011.
Yet consider the anchoring bias from 2009, Brisbane finished inside the eight and virtually every pundit assumed they were set for another finals spot in 2010.
You need to look at every variable.
On the investing front, I’m aware of the tale of one investor who bought failed investment bank, Babcock & Brown at their IPO price of $5. Over several years he rode the stock to a high of $33.90, then the GFC hit.
Ignoring the tales of woe coming from the bank, their inability to refinance debt and a nosediving share price, the investor anchored his beliefs of where the share price could go between those two figures.
He believed the share price couldn’t go any lower than $5 and because it had previously been as high as $33, he thought it could always get back there.
Babcock & Brown shares did get to 33 again, 33 cents that is, before the administrators moved in and it was eventually delisted from the ASX at 32 cents.
By refusing to actually acknowledge the perilous state of the company and focusing on two completely irrelevant numbers, the investor cost himself a substantial amount of money.
He’s consoled by the fact he’s carrying forward a large tax loss to offset any future gains – if he doesn’t get caught anchoring again!
Peter Mancell is a director of Mancell Financial Group and FYG Planners AFSL 224543. This information is general in nature and readers should seek professional advice specific to their circumstances. If you’d like help with your financial future, we might be Australia’s best financial planner. We think we’re Tasmania’s best financial adviser and
