Anchoring effect
In the series of 21
behavioural biases we will discuss the 19th bias “Anchoring effect”
Like a ship controlled at bay with an anchor, similarly we
also anchor thoughts with few data, hypothesis and average observations.
Let’s look at an example. Asking women her age is like next
to crime😊 .
Still what tools we use to guesstimate her age will be something like this.
Kid’s age or education year or marriage year or husbands age minus 3-4 yrs age
difference and so on. Some might consider looks to estimate age also.
Well, all the methods will mostly allow us to estimate the
near correct age of a woman. But it’s not true in current world as women don’t
marry at 25 nor they have child so soon or the difference in spouse age could
be more than 4 yrs or even wife could be elder to husband😊
Anchoring effect makes us generalise a few traits and events
to be true forever and for all. Haven’t we made prototype image of how doctors
should look or how Banker/Investment managers look. Any other appearance of
them makes us conclude about their sincerity to profession. Isn’t it??
Don’t we say Chinese are crooks, western guys are spendthrift?
Arabs are rich and lazy and Japanese are hardworking and honest.
Anchoring bias works on Investments too!! Answer yourself
about a few expected returns and risks
1)
Don’t you feel all FDs are safe? Be in
co-operative Bank, corporate or any other.
2)
Don’t you feel FDs must return around 8-9%
3)
Equity must deliver over 15% -25% return?
4)
Wise to Invest in equity is to look for multibagger,
make quick buck and exit?
5)
Properties are best for highest return
6)
Property prices never fall.
7)
Gold is solid Investment class.
I am sure you are aware that all the above anchors are
faulters.
Anchors are important for evaluating investment options but
segregation of irrelevant anchors are most important in successful investing. There
is no substitute to critical thinking in investing.
Broking companies give buy and sell call or expert speak of
the stock and markets. They might have different audience, perspective and
hidden agenda. Why should you anchor your thoughts around that? Staying
invested is best policy, certainly reduce risk from time to time but timing the
market is total waste of energy. Recall how many times markets have surprised
you? Recall how many calls of the analyst, broker or expert on TV and print
have been right?
Wise way of Investing is establishing time tested anchors
like- Valuation, risk v/s reward and simple and transparent products. Ancillary
anchors could be inflows, sentiments, Global/domestic growth rate, Interest
rate etc. to name a few.
We at Wealthcare Investments also believe in the well-established
Anchors and manage portfolios. We use ancillary anchors for generating extra
returns from portfolio (opportunist approach). We had started investing in
small and Midcap segment since Mar 19 and investing currently also (albeit with
STP route). Results have been quite good. With Ancillary anchors, we don’t
commit full money of sizable money. We still hold safer assets in portfolio
like liquid funds, Asset allocation funds, Hybrid funds etc. When we see
visibility of the well-established anchors playing out, we will be quick enough
to go aggressive in portfolio. Our philosophy is- Investors don’t mind lower
return but do mind higher risk/losses.
As an Investor, One must have rational approach in investing
exuberance may work sometimes, not always. As I mentioned in my previous blogs
also – many investors approached us when markets were scaling heights and they
showed resistance when markets were cheap.
What should you do as an Investor?
1)
Decide on the few solid time tasted Anchors for
your decision making.
2)
Pay attention to process of Investing rather
than returns alone.
3)
Do not pay attention market noise. Most of the
times they are NOISE only.
4)
Pay attention to your goals rather than returns.
Of course returns are important but Goals and risk controls are even more
important.
5)
Time in market is more important than timing the
market. Experts have also failed in timing the market.
6)
Listen to your financial advisor. If you don’t
have, appoint one.
MF Trivia: Investing Money in FDs because you need safety?
Consider debt mutual funds. They are capable of giving higher tax adjusted
returns. Although returns are not guaranteed like FDs, they did beat the FD
returns since many years. Speak to us for more details.
If you find our blogs helpful, pls do like, share and
comment
Author –
Bhavesh D
Damania
Founder - Wealthcare
Investments
EduPrenuer,
TV show panellist and Blogger
"Risk comes until you know what, where and why you are
Investing"
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