Why do we fall prey to these Discount sales? What drives our mind to feel that we are getting the best price at discounts? The initial price information plays an important role in choosing that product or choosing any other product of the same category. This is because the initial price starts playing as an anchor in our mind. A lot of our day to day decisions are driven by this anchoring bias.
What is Anchoring?
Anchoring is when an individual relies heavily on an initial piece of information while making decisions. For example, when you are looking to buy a particular item, people around you would have informed you that this type of stuff would cost you X amount. Immediately your mind has anchored this cost to the product.
Once the value of this anchor is set, all future negotiations, arguments, estimates, etc. are discussed in relation to the anchor. This bias occurs when interpreting future information using this anchor.
In 1974, Amos Tversky and Daniel Kahneman conducted a study asking a question to the participants in each group. They asked people to estimate how many African countries were part of the United Nations, but first, they spun a wheel of fortune. The wheel was painted with numbers from 0 to 100 but rigged to always land on 10 or 65. When the arrow stopped spinning, they asked the person in the experiment to say if they believed the percentage of countries was higher or lower than the number on the wheel. Next, they asked people to estimate what they thought was the actual percentage. They that found people who landed on 10 in the first half of the experiment guessed around 25 percent of Africa was part of the U.N. Those who landed on 65 said around 45 percent. The subjects had been locked in place by a psychological phenomenon known as the anchoring effect.
The trick here is no one really knew the true answer. They had to guess, yet it didn’t feel like a guess. As far as they knew, the wheel was a random number generator, but it produced something concrete to work from. When they adjusted their estimates, they couldn’t avoid the anchor.
I will share another most common anchoring used by brand owners to sell their products. Outside their outlet, they will post Big Sale, 70% off on products, Mega sale, etc. These posts attract customers to the store and anchor them to a particular discount rate. Once you as a customer enter the store, the most liked products are neither on sale nor have the maximum discounts. Since your mind is anchored to a particular price band, even if the product is not worth the value, most of us end up buying it thinking it is the best deal.
How does this anchoring bias affect our investment decisions?
For example, the whole media, newspaper, television channels & people around you say it is the best time to be in equities and everyone are making lots of money OR everyone is in deep fear and exiting from the stock market, automatically your mind is anchored you to like / dislike the asset class or take action on your portfolio. So the most natural decision to make is to go ahead and invest into / exit that asset class irrespective whether it suits your goals/risk appetite.
In almost every article that I write, I keep repeating only one point ie. your investment decisions will have to depend only on your goals, time horizon and your risk taking capacity. Everything else should not impact your decisions. Here I am repeating the same point.
I am leaving you with this thought, are these numbers relevant in the long run? Are these anchors relevant in the long run for your investments to grow?
Assume you invested in May’15 @27828 Sensex and 15 months later still your investments are at the same level. Obviously, if you anchor the entry-level and keep measuring the returns in the short run it will be very difficult to stick to the investments.
Anchor yourself to the goal and time in hand rather than the entry-level or price movements. Equity investments will grow with patience and time.
The way it takes time for a kid to grow an adult, a plant to become a tree, a career to grow, so are our investments. There is no shortcut to investments.
Don’t Let these anchors determine the fate of your investments. Take charge and be patient.
See you next Monday with a new bias and its impact on your investments.
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