 |
|
|
|
|
|
| Course 510:
Behavioral Finance |
| Behavior #3: Anchoring |
|
|
|
|
Ask New Yorkers to estimate the population of Chicago and they'll anchor on the number they know--the population of the Big Apple--and adjust down, but not enough. Ask people in Milwaukee to guess the number of people in Chicago and they'll anchor on the number they know and go up, but not enough. When estimating the unknown, you cleave to what you know.
Securities analysts often fall prey to anchoring. They get anchored on their own estimates of a company's earnings, or on last year's earnings. Say an analyst had previously forecast that a firm would post quarterly earnings of $0.50 per share, and the firm posted actual earnings of $0.60. The analyst would then raise his forecast for next quarter's earnings, but not by enough.
For investors, anchoring behavior manifests itself in an unwillingness to part with laggard investments. Many time investors will cling to an investment waiting for it to "break even," to get back to what they paid for it. You may cling to subpar investments for years, rather than dumping them and getting on with your investment life. It's costly to hold onto losers, though, especially in a taxable account: If you realize a loss, at least you can use it to offset realized gains.
Some behavioral finance types recommend that you ask yourself: Would I buy this investment again? And if you wouldn't, why are you continuing to own it?
Next:
Other Behaviors to Avoid >>
|
