What is anchoring bias?
This is a behavioural bias wherein investors tend to get attached to a certain benchmark or number and allow it to influence their investment decisions overwhelmingly.
How does this affect investors’ behaviour?
Take the example of a fixed-income investor. Suppose that one-year fixed deposits (FDs) gave 8.5 per cent return some time ago but now offer around 6.5-7 per cent. If an investor is anchored to the 8.5 per cent level, he may not invest at all. Alternatively, he may invest in instruments that have the potential to offer an 8.5 per cent return but carry a higher level of risk. In equities, too, investors fall prey to this bias. An investor, who purchased a stock at Rs 500, may continue to hold on to it even after its price has tumbled to Rs 200 in the hope that it will recover some day, while ignoring the deterioration in its fundamentals.
This is a behavioural bias wherein investors tend to get attached to a certain benchmark or number and allow it to influence their investment decisions overwhelmingly.
How does this affect investors’ behaviour?
Take the example of a fixed-income investor. Suppose that one-year fixed deposits (FDs) gave 8.5 per cent return some time ago but now offer around 6.5-7 per cent. If an investor is anchored to the 8.5 per cent level, he may not invest at all. Alternatively, he may invest in instruments that have the potential to offer an 8.5 per cent return but carry a higher level of risk. In equities, too, investors fall prey to this bias. An investor, who purchased a stock at Rs 500, may continue to hold on to it even after its price has tumbled to Rs 200 in the hope that it will recover some day, while ignoring the deterioration in its fundamentals.
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