Anchors away! And what to do about it.

According to Investopedia, anchoring bias is “Anchoring is a heuristic in behavioral finance that describes the subconscious use of irrelevant information, such as the purchase price of a security, as a fixed reference point (or anchor) for making subsequent decisions about that security.”

This is a bias that occurs all the time in our lives. The most common is when we take a day of the year and make it special in our minds. Birthdays, anniversaries, etc. This makes sense as in our lives these are big deal events. However, we cannot expect everyone to apply the same weight to those days (at least for the same reasons).

This bias shows up many times in finance. One is focusing on the price you bought an investment in, as stated above. Another is your monthly statement. Whatever the highest value you remember seeing becomes the foundation for your thoughts about your account. There are lots of reasons it may fluctuate and focusing on that change without an understanding of the economic or market picture can cause emotional decisions. Further, many in retirement require income from their portfolios that affect the value.

The best way to overcome anchoring bias with your investment accounts is to have an updated financial plan. While we all get in the habit of following market prices on the evening news, the ideal benchmark is your life goals and desires. We know the market and economy will ebb and flow, a sound plan accounts for this and reduces the risks that your goals fail. The effect on your plan that these economic swings have is more important than the view of the bottom line of your statement.

Do you need help forming a financial plan? Analyzing the bias inherent in all human behavior or applying a risk management-focused investment strategy? Give our offices a call, we would be honored to offer a second opinion!