#44 - Anchoring to the High
The intersection of finance and psychology is fascinating. Being aware of our own biases can significantly improve financial decision making.
I am not sure if it is loss aversion, inertia, some other bias, or just normal human behavior, but we hate going backward. For whatever reason, we anchor ourselves to the most recent high. This applies when thinking of your investment account balance or just your net assets in general.
That high becomes the new measure of what is good or bad. If we purchase an investment at $1,000 and over the next year it steadily rises to $5,000, we feel very happy about our return on investment.
If instead though the stock goes from $1,000 to $25,000 and then back down to $5,000 at the end of the year, we don’t “feel” nearly as good (especially if our neighbor sold at $25,000).
The unfortunate thing with investing is there is volatility.
Simply being aware of the existence of volatility and being cautious to not make the new high our anchor, will give us a foot forward in weathering the next wave of volatility- whenever that may be.
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This is incredible. Well done Gwynn.
Thank you for reading! Do you have any personal biases that affect your financial decision making?