Keep­ing an eye out for an­chor­ing bias

Finweek English Edition - - INVEST DIY - BY SIMON BROWN

As hu­man be­ings we suf­fer from nu­mer­ous cog­ni­tive bi­ases, things that make us think in cer­tain ways that are for the most part not help­ful. One that hits in­vestors es­pe­cially hard is the an­chor­ing bias.

An­chor­ing bias is the re­sult of us as hu­mans re­ly­ing too heav­ily on the first piece of in­for­ma­tion that we get when mak­ing a de­ci­sion – in other words, the first im­pres­sion. This can hap­pen when you meet a new per­son or when you first see a house you’re po­ten­tially look­ing to buy. If the first im­pres­sion of the house is neg­a­tive it will take a lot to con­vince you to buy, whereas if it’s pos­i­tive, the agent will hardly have to do any work as you’ll be hooked. The prob­lem is that in­for­ma­tion we re­ceive af­ter that f irst im­pres­sion may be crit­i­cally im­por­tant, but we dis­miss it as less im­por­tant.

When in­vest­ing, that an­chor­ing typ­i­cally in­volves the price of a share; ei­ther the price paid or a price we re­mem­ber. Of­ten, the price we re­mem­ber is when we first saw the stock.

For ex­am­ple, I re­mem­ber putting an of­fer in to buy Naspers* at R248.50. The of­fer was R250 and I never got the stock. Now, with Naspers at around R2 000, I still have that R248.50 im­printed in my mind and strug­gle to move on from it. It’s not just that I missed a great in­vest­ment, it is also that I still think Naspers is a buy at R248.50 and strug­gle to ad­just the new val­u­a­tion of some R2 000.

The other side of this is when a stock has fallen and we are an­chored on the higher price. Here Kumba is an ex­am­ple. A reader emailed me to say that they’d been watch­ing Kumba slide from around R500, so surely now it is a buy at around R130? The is­sue is that the R500 price point is to­tally mean­ing­less. It is a ran­dom fact that the reader re­mem­bers the R500, what mat­ters now is the prospects for Kumba go­ing for­ward.

Fur­ther, we tend to be­lieve that a stock will get back to the price we re­mem­ber, so if R500 is the ‘tar­get’ it must be a steal at R130. This is just not re­al­ity and many AN­CHOR­ING BIAS IS THE RE­SULT OF US AS HU­MANS

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