Finance 6. Anchoring is is the mental tendency to rely heavily (“anchor”) on a speci c piece of past information when making a decision about new information. Here’s an example: let’s say that you’re strolling through the wealthy part of town. You see a designer T-shirt in a store window selling for $1,000. You think to yourself: that’s crazy expensive; you’d never buy that! So you keep walking and, at the very next store, you see a similar T-shirt with a price tag of only $100. You may very well view the second as cheap, because you “anchored” on the rst piece of data ($1,000) when you evaluated the price of the second. Anchoring happens all the time in the investment world. For instance, many investors base their consideration of whether a given investment is “cheap” or “expensive” on the rst piece of information they see: the share price. Of course, current share price has little correlation to whether a stock is intrinsically cheap or expensive − it’s the underlying health and outlook of the business that counts. How to protect yourself −Try to focus on the criteria (both the pros and the cons) for your buy or sell decision, rather than on one speci c reference point (i.e. the stock price). Figure out what’s really important to you about an investment before thinking about a price at which to buy (or sell). Above all, remember: price and value are two di erent things. You can come up with an independent idea of the latter, regardless of what’s going on with the former. 5. Recency bias If you’re like most people, chances are that you remember what you ate for dinner last night a lot better than what you ate for dinner, say, last March 19. Unsurprisingly, it works the same way with investing: investors o en remember and give greater credence to recent market news and price movements a lot more than historical norms and trends. at can be dangerous, because extrapolating future results or trends from recent news or performance (whether good or bad) can distort our evaluation of a given investment: we buy into an investment whose price has risen dramatically because we assume that the recent good times will continue, or we ignore investments that have dropped recently, because we assume that the recent bad times will continue. How to protect yourself −you can resist such bias by emphasizing thereasons why you’re buying or selling − your thesis about a particular investment trend, the long-term reason to be optimistic (or pessimistic) about a given company’s prospects, how a given asset ts into your overall nancial plan, etc. Keep a record of these ideas − it will help you develop a more dispassionate view of which investments are working, and which aren’t. 4. Herd mentality Have you ever been watching a play (or maybe a musical, opera, or comedy show) and seen someone stand up and start to applaud? Chances are that someone else will stand up and join them. en a few more stand up. And then several more. Suddenly you feel a kind of “pressure” to do the same. at’s the herd mentality – feeling the urge to do something because everyone else is doing it too. It’s a particularly obvious bias when it comes to investing, which can o en lead investors to stampede into “hot” investments (or hot sectors), even when there’s no obvious long-term reason to do so. Case in point: marijuana stocks. Or bitcoin. Or the FANG stocks (Facebook, Amazon, Net ix and Google). Don’t get us wrong: there may very well be sound reasons for investing in any of these. But let’s not kid ourselves: the main reason most investors are in them is because…well, everyone else is, and we don’t want to miss out. How to protect yourself −approach “hot stocks” or “IN sectors” or “the next big thing” with a good deal of scepticism. In the end, the crowd may be right. Or it may not be. e way to nd out is to do your own homework and make a thoughtful, carefully considered, independent decision. 34 | www.snowbirds.org
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