Are you aware of the anchoring effect in stock investing? This cognitive bias can have a big impact on your investment decisions. Here’s a quick thread on what it is, how it affects investors, and how to overcome it.
The anchoring bias is a cognitive bias that affects stock investors. It occurs when investors rely too heavily on a piece of known information when making investment decisions.
For example, an investor may fixate on the current stock price and use it as a reference point for a future “return to greatness”. The fundamentals in the business or market may have changed permanently, so the old value is no longer an accurate reflection of the stock’s potential.
This bias can lead to irrational decision-making and can cause investors to overvalue or undervalue a stock. It can also cause investors to hold onto an investment for too long, hoping it will return to its previous price. Or buy when it returns to a previous bottom.
The best way to overcome the anchoring effect is self-awareness. Do your research to build a well-founded assessment of a stock’s potential using multiple sources. Especially avoid relying solely on a known current metric like its price.
Establish a clear investment strategy and stick to it, but don’t avoid information or market conditions that challenge your presumptions. Check in on your emotions if they are running high/low.
By being aware of the anchoring effect and taking steps to overcome it, you can make more informed and rational investment decisions.