Oct 31, 2019
Your decisions about money, investing, and retirement must be made based on logic and rational thinking. The problem is that we often make money decisions with our emotions, which can wreak havoc on your retirement and impact you for the rest of your life.
This week is devoted to better-equipping you to make careful, self-controlled, unemotional decisions as often as possible, through better understanding the behavioral finance concepts that influence your decisions.
Today, we’re taking a look at Anchoring bias. Anchoring bias occurs when you rely on the first piece of information to make subsequent decisions. And by relying too heavily on that first impression, you anchor to it, hence the name anchoring bias.
If you have ever bought something that you probably shouldn’t have just because it was on sale, you have been guilty of anchoring bias. Black Friday deals are a perfect example of this. You probably don’t need 20 new pairs of socks, but when 20 pairs are $3, originally $15, you’re not going to NOT buy them. That’s anchoring. You’re making a decision solely on the discount you’re getting off the original price, and you’re so sucked into the screaming deal you’re getting on those socks, you don’t pause to ask yourself if you even want or need 20 additional pairs of socks.
It’s important to be mindful of anchoring when making purchase decisions, so you don’t get so easily sucked into making a decision based on a screaming deal. Anchoring bias also rears its ugly head with your investment decisions, and I’ve seen this all too often with my own clients. And even myself.
When I was 22 years old, I bought a Chinese index fund. I had been hearing a lot and doing quite a bit of research on China, and like many people at the time, I was convinced that China was going to topple the U.S. as the dominant global economic superpower. Their tremendous economic growth prospects were undeniable. So with a couple thousand dollars, which was lot when you’re 22 and fresh out of college, I bought this Chinese index fund. Just a few short months later, the global economy plunged into the great recession of 2008, and my beloved Chinese index fund plunged in value.
I lost ½ of my original investment in less than a year, but because I was anchored to the original price I paid, I was determined to hold on and stick it out until I got back to even on my original investment. This didn’t happen. Another 2 years passed and I was still underwater on my original investment. Thankfully, I did sell and move on, but I ignored the fundamentals and some serious problems that still need to be sorted out with the Chinese government and their economic system.
Investors commonly make this mistake. Stubbornly holding on to a bad investment and ignoring the compelling reasons to sell, all because they are anchored to the original price they paid or their high water mark in the stock.
This is a mistake. Investment decisions should ALWAYS ALWAYS ALWAYS be made with the future potential in mind, not based on anything in the past. So if you are underwater in something, and you know it’s time to cut your losses, don’t let anchoring bias influence you in making a bad decision and holding on to a bad investment because you’re anchored to what you paid or what the investment was worth before things went south.
That’s it for today. Thanks for listening! My name is Ashley Micciche and this is the One Minute Retirement Tip.
----------
>>> Subscribe on iTunes: https://apple.co/2DI2LSP
>>> Subscribe on Amazon Alexa: https://amzn.to/2xRKrCs
>>> Check out our blog: https://truenorthretirementadvisors.com/blog/
----------
Tags: retirement, investing, money, finance, financial planning, retirement planning, saving money, personal finance, wealth management, fee only financial advisor, financial planner, financial podcast, retirement podcast, financial independence podcast, behavioral finance, behavioral finance concepts, behavioral finance examples, behavioral finance biases, why is behavioral finance important, behavioral economics, investor psychology, behavioral biases, herd behavior, herd behavior and investment, herd behavior financial crisis, loss aversion, prospect theory, choice overload, confirmation bias, anchoring, decision fatigue, overconfidence effect