Anchoring (explained in a minutes) – Behavioral Finance

In this lesson summary, the concept of anchoring in the context of investment is explored. Anchoring refers to the tendency of investors to rely heavily on specific information, which may not be accurate or relevant. The example provided illustrates this concept: an investor notices a significant decline in a company’s stock price and becomes anchored to the stock’s recent high value. This investor might perceive the price drop as an opportunity to buy at a discount. However, this could be a misconception. The decline might be due to fundamental changes in the company, such as the loss of a major customer, which negatively impacted the share price. By focusing solely on the previous high and not considering the actual reasons for the price drop, the investor becomes susceptible to the anchoring bias, potentially leading to misguided investment decisions.