Over the next several blogs I will go through the top ten logical fallacies that we all have had or still have.
- The extrapolation error
- The Gambler’s Fallacy
- Hindsight Bias
- The Bandwagon effect
- I wish I had a magic wand fallacy
- Appeal to Heaven
- Confirmation Bias
- Negativity Bias
- The sunk cost error
Let’s begin with “Anchoring”
Anchoring: A quick story
I am at my millionth conference for investment advisors. This is about 15 years ago. The speaker walks out and with no introduction he declares loudly “I can tell each one of you in the audience EXACTLY the amount that each of your clients have in their accounts.” He actually got our attention (and the free Dove Bars had run out) so we all sat up and listened. A long pause from the speaker…and then he declared these astounding words of wisdom, “The highest amount it ever was.” He had hit the number EXACTLY.
As investors, we fixate on the price of a stock or the value of our portfolio at its highest point or where we bought in. If we buy a stock at $100 and it goes to $50, it can become our life’s goal to only sell when the stock gets back to $100. When we do this it is a psychological trick called “anchoring”. It is very expensive. You should look at each stock as if you just got it and then evaluate the prospects at the current price. Anything else forces you to keep (which is the same as buying) a horrible investment just because you have a number anchored in your head.
Years ago, I had a client who at one time had about 1.5 million in his account at its relative peak. Then, when he became our client, he had about 1.2 million. He was “tired of losing money” even though he hadn’t realized any losses yet. About two years after joining us, his account was worth 1.35 million. He left us, saying that “you guys didn’t make me any money either”. I tried to explain that the account had grown since he started with us, but he was convinced that he was still “losing money” because he was anchored on the exact amount in his portfolio, which was of course- the highest amount it ever was.