Ditch Anchoring And Look For The Right Price, Value

Imagine walking into a store of your choice to buy a shirt. You see a tag that says, “MRP: Rs 2,500 – Now available for Rs 1,200.” Suddenly, the Rs 1,200 tag feels like a great deal even if Rs 1,200 was your budget all along. Why? Because your brain just got anchored to Rs 2,500. Another classic example is the way discounts are displayed: “discount up to 50 per cent”. In this case, you would forget the words “up to” because your brain just got anchored to 50 per cent.

In behavioural finance, anchoring refers to the tendency to rely too heavily on the first piece of information (which becomes the “anchor”) when making decisions. It usually applies when we hang on to a number, fact or return figure that has no bearing on the overall investment or spending decision.

Anchoring In Investments

Even in the world of investments, anchoring can quietly sabotage rational thinking. Whether it is stock prices, valuations, or even expectations of returns, investors frequently base decisions on certain “anchors”.

If you have ever refused to sell a stock because it has not yet “reached your buying price”, you have fallen for this mental trap. Let’s say you bought shares at Rs 1,600, and the price falls to Rs 1,200, but you won’t sell until it goes back to Rs 1,600 even if recovery is unlikely anytime soon. In this case, you may be anchored to the purchase price.

Take another example on returns from a property you own. Suppose, you got a rent of Rs 35,000 per month. Later, due to a market correction, the prevailing rental rate in the area drops to Rs 30,000. But anchored to the old rate, you wait for a tenant willing to pay Rs 35,000. As a result, your flat remains vacant for, say, two months, before you decide to rent it out at the prevailing market rate or find a willing tenant, thus causing you a notional loss of `60,000.

So, the next time you get stuck on a number, look at it again

How To Overcome Anchoring?

Identify if you are in the habit of getting anchored, when shopping or investing.

Reassess your shopping or investing decisions by looking beyond the numbers.

When shopping, stick to your budget and the initial list or plan to avoid overspending.

In investments, don’t get stuck to historical prices. Assess them based on current fundamentals and realistic situations.

Calculate what will be more profitable—sticking to the number you are anchored to or the real estimations.