Definition: Anchoring refers to the tendency to rely too heavily on the first piece of information encountered (the “anchor”) when making decisions.
How it Impacts Investors: Let’s say you are considering buying a stock currently trading at $50 per share. You do some research and find out that the stock once traded at $100 per share. The anchor, in this case, is the $100 price, and you might be more likely to consider the stock undervalued at the current price because of it.
It is crucial to be aware of the potential for anchoring bias when making investment decisions. This means being mindful of the initial information you encounter and not letting it unduly influence your decision-making process.
How to Handle: One way to handle anchoring bias is to seek out multiple sources of information actively and to consider a range of potential outcomes. It can also be helpful to consider the current market conditions and to compare the stock’s price to its intrinsic value rather than to its past price.
Recommended resources:
- “Thinking, Fast and Slow” by Daniel Kahneman
- “Influence: The Psychology of Persuasion” by Robert Cialdini
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