Truly, madly, deeply anchored

I recently had a “psychological experience” at a book store. I collected couple of CDs to drop into my shopping cart when I realised that the store had a 50 per cent discount on them till a fortnight ago. Peeved with myself for missing the sale, I placed the CDs back on the shelf and just moved on! If you have also had such experience, it is worth noting that we behave similarly when we take investment decisions. How?

Missed a ‘value buy'

We would have most likely bought the CDs at their regular price. But when we notice that the same CDs were available for a 50 per cent discount just a fortnight ago, we then feel the pain of paying 100 per cent more today. Importantly, the crossed discount sticker tells us that we missed a “value buy”. And that hurts.

If we are typical consumer, we would wait to buy the CDs at the next discount sale. Or buy it a regular price sometime later when the pain is forgotten and the discount sale is a faded memory! The crossed discount sticker essentially changed our value perception of the CDs. Psychologists call it Anchoring Bias. In this case, our decision is anchored to the discount price.

Anchoring bias

Anchoring bias also plays itself in the stock market. Suppose you read an article and feel compelled to buy a stock. You also notice that the stock was recently trading near its 52-week low. You then realise that it has moved up 10 per cent in one week. What would you do?

Chances are you will pass the investment opportunity, hoping to buy the stock if it declines again. But buying CD is different from buying stock. You buy a CD for self consumption. You buy a stock for selling at a higher level.

Passing up a regular priced CD is unlikely to prove costly. Not buying a stock could result in missed opportunities. What if the stock continually climbs up? Would your anchor price change as well?