Anchoring Bias Affects How You Invest
Whenever we make a decision, we often have a reference point. Everybody has a different reason for how they get to that point. For example, when a friend with similar work experience tells you his/her salary range, he/she could influence your negotiation. Even when you have searched information online to know what others in comparable situations earn. We favor the first bit of information we learn according to Amos Tversky and Daniel Kahneman.
When you invest, the share price is the reference point that influences your decision making. For example, after conducting research you have found several interesting companies. Most times, a big part of investing has to do with your willingness to pay the share price. There will be companies you like, but you perceive them as too expensive per stock. Therefore, you could buy shares of index funds where these companies are included.
The decision to pick stocks
When you like to analyze companies and decide if they are worth the investment, you might pick stocks. Knowing someone who has doubled or tripled their initial investment through picking stocks might affect your investment strategy. The possibility of achieving a similar return on investment could become your reference point. Every investor wants to find the Netflix of the new decade and have a 4000% return. An…
