Welcome back to our "ABCs of Behavioral Biases." Let's examine four self-inflicted biases that knock a number of investors off-course: anchoring, blind spot, confirmation and familiarity bias.
Anchoring bias occurs when you fix on or "anchor" your decisions to a reference point, whether or not it's a valid one. An anchor point can be helpful when it is relevant and contributes to good decision-making. For example, if you've set a 10 pm curfew for your son or daughter and it's now 9:55 pm, your offspring would be wise to panic a bit, and hurry home.
When is it harmful? In investing, people often anchor on the price they paid when deciding whether to sell or hold a security: "I paid $11/share for this stock and now it's only worth $9/share. I'll hold off selling it until I break even." Evidence-based investing informs us, the best time to sell a holding is when it's no longer serving your ideal total portfolio, as prescribed by your investment plans. What you paid is irrelevant to that decision, so anchoring on that arbitrary point is distracting.