This is a term used in psychology to describe the common human tendency to rely too heavily, or “anchor,” on one trait or piece of information when making decisions. During normal decision-making, individuals anchor, or overly rely, on specific information or a specific value and then adjust to that value to account for other elements of the circumstance. Usually, once an anchor is set, there is a bias toward that value.
Take, for example, a person looking to buy a used car — they may focus excessively on the odometer reading and the year the car was manufactured and use those criteria as a basis for evaluating the value of the car, rather than considering how well the engine or the transmission is maintained. Anchoring as it relates to investing works in the same manner and is evidenced when an individual receives a piece of information that aligns with their personal belief system or their emotional psyche, and they gravitate towards it and allow it to influence their decisions beyond its relevance.
Think of it like a massive battleship that is anchored by a much smaller object—one that keeps them locked in that mindset. Resultingly, when new information is received that should move them away from their emotional predisposition, they turn away and deny its truth. Again, think about how a small anchor that weighs 60x less than the ship it holds in port is able to contain a 100,000-ton battleship. That’s how a small piece of emotionally based information can shackle the logical thought process of any human… and why Anchoring Bias can be such a powerful and negative influence.
Usually, an anchor that holds down a ship has a 7:1 width-to-depth ratio; meaning the length of the line of the anchor stretches longer/wider than deep. Just as with people that base decisions on emotions and anchor their beliefs, the depth of that belief is shallow, and they hold on to it for a long period of time… just like the length of the line of an actual anchor vs. its depth. Several popular examples of Anchoring Bias are:
- National Debt – I will not invest in the stock market because of the national debt being so high. I will purchase gold instead. As a percentage of GDP, the national debt is higher than normal but at a 1:1 ratio, it is not out of bounds.
- Political Views – Because I do not like the President or the party in power, I will not invest. We heard this from Republicans when President Obama was in office and now with Democrats and President Trump. Look at the policies and which sectors/industries they favor. There are always businesses that are favored due to policy no matter who is in office.
At Nepsis®, we believe clarity is the only cure for Anchoring Bias. Clarity allows investors to stop being anchored by a limited amount of information that aligns with their emotions that is not relevant to the decisions that are being made based on that information. It’s crucial for investors to break free. Why? Because clarity allows us to pursue freedom in both our investing and life! Free yourself from the chains of Anchoring Bias and allow your investments to do the best they can! Anchors away!
Advisory Services offered through Nepsis, Inc.; An SEC Registered Investment Advisor.