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  • Writer's pictureOwen

Has anchoring bias got you stuck?

Quick: Does South Korea’s population was greater or lesser than 15 million?

With no internet research what would you guess?  Write your best guess.

Research shows that suggesting a number influences the guess.  Not just in that scenario, but in many, a known or stated number will influence your choice, even if there is no rational reason why it should. 

Consider these scenarios that are pretty common.

  • I don’t want to sell at a loss. I'm sure this investment will succeed eventually.

  • My neighbor got $400,000 USD for his house last year, so I should get that!

  • I invested $300,000 USD in my business and I should get at least that much back.

  • I don’t want to invest in the United States.  The economy has been bad since the Pandemic (or since Trump left office).

None of these statements are rational. Yet all are quite common. 

Consider what happens in each scenario.

1. Why waiting for a profit isn’t always a good idea.

This isn’t a hint about taking a loss on a share for tax reasons, although that sometimes is a good idea.  The true question is “Given what I know today, what shares have the best outlook?”  You should then hold these shares.  Consider the following. 

You own Nio which you bought at around $30 a share a few years back. It is now $1.30 ish.  Should you hold on?

Many people don’t like to sell at a loss.  It is like admitting failure.

Even though Chinese EV manufacturer Nio isn’t profitable this year, and competition is growing, many people will keep waiting. Maybe it will come through but given competition from Tesla, BYD and many others, it is becoming a longer shot every quarter as the shrinking share price shows.

Another option would be to buy a growing company like Microsoft that could grow its share price by 15% per year (or more) for many years.  Many will keep Nio and ignore the growing company.  But what if Nio never makes it and goes broke?  What if it takes 20 years to recover your money?  Is that a good growth rate on your money?

Action: When reviewing your portfolio, consider:

  • would I buy this share at its price today, knowing what I know now? 

  • Would I consider another share more attractive? 

Use these questions to base your decision, without any reference to where you bought it at.  It feels wrong, but it is the logical decision making process.

2. Does beating your neighbor really matter?

I’ve seen many people make decisions this way. They want to achieve “their number”, often based on previous market conditions and remain wedded to this number despite problems it causes them.  I have a client who has a property in Shanghai right now, that wants to sell but hasn’t because the figure is still 2 million RMB below what the property was worth 18 months ago. 

This is despite the fact that they will put the whole family on hold from leaving Shanghai, and have missed out on some good US stock market returns in 2023. 

Yet, because they haven’t hit their number, they have put their life on hold. Life is stuck AND they missed opportunities.

Few expect the Chinese property market to quickly rebound and many expect a further slide, much like Japan given a similar shrinking population,

3. Sunk cost doesn’t matter.  Value today matters.

Small business owners and indeed some property investors find this difficult to get over. 

The business is worth a combination of the assets and the cash-flow that it brings in. In other words, how much money can this business make its new owner.

The new business owner doesn't care if you put your life savings into the business..

4. Are you still in fear like it is pandemic crisis?

A common bias is to be anchored to a past reality.  Regularly we still see investors online in the US still afraid of a housing bust. Some, are, still convinced that the US economy is still in recession. 

The fact is that US economy is actually doing pretty well. Employment growth is solid on the back of firm investing from large companies. Unemployment is still close to record lows around 3.7%. Inflation jumped in January but the overall trend is continued cooling.

If anything, the US Federal Reserve worries the economy is too strong!

Perhaps politics or the spike in inflation in 2022 shapes your perspective. Are your assumptions on performing and underperforming economies still rooted in the past?

Greece is doing well these days! That's quite a change.

This advice is useful, not just for investing, but also for negotiating and sales.  A starting price often influences the outcome considerably. 

Be sure to position it in your favor, just be careful of overdoing it.

In case you are wondering, South Korea has about 51 million people. Were you close?

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