Anchoring bias

[freecapital]

Nice article on solutions to flight our anchoring bias :

-SNIP-

Although the anchoring bias can be very difficult to overcome, the following strategies may help dull the effects of anchoring when you think it may be wreaking havoc on your investment decisions:

1) First, I think it is important to be acutely aware of the anchoring bias and realize that it comes into play to a certain extent with almost every buy or sell decision. Whether it is the 52 week high, 52 week low, the price you initially looked at the stock price, or the price at which it traded at 2 years ago when it was a fraction of today’s price, I think it’s helpful to identify what the anchor price may be in each situation. I think you do need to be careful, because focusing on the anchor price could intensify it’s effect. However, if you can recognize that there is an anchor at play, you can devise a strategy to help minimize it.

2) In 2001 Galinsky and Mussweiler proposed a strategy to resist the anchoring effect. They suggested that negotiators (investors) focus their attention and search their memory for arguments against the anchor. For example, in the case where a stock has moved sharply off it’s 52 week low, where anchoring to the 52 week low may come into play, one could search their memory for previous instances of missed opportunities in similar situations where multi-bagger stocks were missed due to anchoring. This year, I started to keep an investment decision journal so that I can go back and analyze these missed opportunities and faulty decisions with less hindsight bias.

3) A very smart investor has suggested having a “wall of shame” with long term price charts of multi-bagger stocks and circling the price at the lower left corner of the chart where you had anchored and missed the opportunity. When you feel you might be subject to the anchoring effect, you could look at your “wall of shame” which might lessen the weight of the anchor.

4) In Thinking Fast and Slow, Daniel Kahneman suggests deliberately “thinking the opposite” to help deal with the anchoring bias in price negotiations. In a situation where there is likely a strong anchor, one could ask the question “despite my being influenced by price anchoring, is this stock attractively priced in relation to it’s future business prospects at today’s price, ignoring what price it traded at recently?” Instead of focusing on the price that it recently traded at, focusing on the expected value of the stock two or three years into the future, one may be able to reduce the weight of the anchor.

https://espacemc.com/en/general-en/anchors-aweigh

[SaulR80683]

Hi Free Capital. I think that the key thought is this:

“despite my being influenced by price anchoring, is this stock attractively priced in relation to it’s future business prospects at today’s price, ignoring what price it traded at recently?” Instead of focusing on the price that it recently traded at, focusing on the expected value of the stock two or three years into the future, one may be able to reduce the weight of the anchor.

I usually succeed in not thinking of past prices. I just assume that any good stock I might want to buy probably traded at a lower price some time before I found out about them…Duh… But so what? I can’t go back and buy them in the past. What I care about is whether they are a good buy now and where they are going from here. I see so many people who are “waiting” for a lower price, a better buy in point, or whatever. They may get it and save a dollar or two, or they may not get it and miss a $50 eventual rise in the stock.

Saul

[brittlerock]

Saul,
As usual, you posit logic where emotions tread heavily.

I’m not faulting you for it, not in the least. Bravo, well done old chap, pat on the back and all that . . . But, as a former psych guy most assuredly you understand the futility of telling someone all caught up in their gut feelings to think clearly now.

Not that I have a better response. Maybe daily meditation in order to help clear the mind . . .

[SaulR80683]

Saul, As usual, you posit logic where emotions tread heavily. I’m not faulting you for it, not in the least… But,…most assuredly you understand the futility of telling someone all caught up in their gut feelings to think clearly.

Hi Brittlerock, I wasn’t talking logic, I was talking about my own responses which come from lots of years experience in the market, and from common sense. For example:

Since we are talking about Avignon on another thread, I originally bought some as high as $21 and $22 (as well as around $17 and $18), but when I decided to get out and put my money elsewhere because Avigilon wasn’t panning out, it never even occurred to me, and I mean that honestly, it never even occurred to me, to wait until it got back to $22 so I could break even on those shares. I sold at an average price of about $17.50 by the way. (It’s now at $14.40).

Another example which I’ve used before: Early in the 3D printing craze I bought some AMAVF at about $15.30 I think. That was the price it was selling at. (It was before the 4 for 1 split). I never considered trying to wait to get it 25 cents cheaper or even a dollar cheaper. Later that same year it got to $190 for about a 12-bagger in less than a year. Do you think I remembered, or cared, whether I spent $15.10 or $15.40 per share?

Then, I recently added to my INBK even though it had run up considerably from my initial purchases. I had initially bought at $16, but I added a lot more at $22. Should I have hesitated because it had been cheaper a few months ago? Should I have berated myself because I didn’t buy more then? and maybe decided to wait and see if it would sell off so I could get some cheap? No way! Its last five quarterly earnings were 13, 22, 28, 32, and recently announced, 46! If they just increase by a nickel next quarter they’ll be raising trailing earnings by over 100% and have a trailing PE of 15.6. I’m buying them at the price they are available NOW.

When I first bought CRTO at $38 and $40, it had been as low as $25 just seven months before. So what could I do about that??? I wasn’t aware of it then. I bought it when I found out about it because I thought it was a buy THEN.

Now, none of that is “logic”. It’s just common sense as I see it.

Hope this helps.

Saul

[ibambi71]

Saul,

Are any of your current favorite stocks still a buy? I have recently freed up some capital and wanted to allocate to something beyond my existing holdings.

Yes, the market has run up, we’re due for a correction, doom and gloom etc. I started out with MF Pro, then One, then discovered this board. All who post here are an amazing resource! I am trying very hard to avoid anchoring as much as possible.

thanks, B.

[SaulR80683]

Saul, Are any of your current favorite stocks still a buy? I have recently freed up some capital and wanted to allocate to something beyond my existing holdings.

Hi bambi, I guess I think they are all “buys” or I’d be selling out of them, but some of them have had huge run-ups lately (SWKS, SKX, AMBA, EPAM, etc). I guess if I had some cash to invest I might look at BOFI and INBK first right now.

Saul