Understanding the psychology of investing is on my “what's important” list. As Yogi Berra once put it, “Ninety-five percent of this game is 50 percent mental.”
Your mental attitude toward investing is critical. Entire books have been written about its importance. Academic studies exploring the subject are now popular. So let me touch on some of the psycho-logical topics that are relevant to your investing success.
Anchoring is a universal psychological phenomenon. We tend to base estimates and decisions on known anchors or familiar positions, with an adjustment relative to this starting point. Anchoring influences the way we intuitively assess probabilities. That's because we are better at relative thinking than absolute thinking.
Here are some familiar noninvestment examples of anchoring:
In all these cases, we are influenced by the anchor. We don't really know if anyone ever bought at the list price. We don't know if the discount price is a good value just because the asking price of a house has been reduced.
Anchoring has a number of applications to investing.