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Where are you anchored?
Anchoring is when you may not realize that you are using irrelevant information to make decisions.
We anchor on a variety of things. For example, we may be anchored on the price we paid for a stock and say to ourselves that when the stock gets back to that price I’ll sell it. This is anchoring as well as loss aversion.
Unfortunately, the stock doesn’t care what you paid for it. You may be giving up other opportunities because you are anchored on something that doesn’t actually matter.
Here’s another one. Your neighbors sold their house six months ago for a really good number. Your house is nicer so you should get an even better number.
You anchor on that price that you so justly deserve. Except interest rates are higher, the stock markets are down and homes are not selling as quickly as a half a year ago.
When you are anchored on a price, you may not only be listing your house for too much money, but you may be insulted when a legitimate buyer offers today’s realistic price. Anchoring is a great way to get stuck holding your home way longer than you had hoped.
But anchoring doesn’t just potentially cost you money, it also makes you unhappy. The stock market reached its all-time high on the first trading day of this year, Jan. 3.
If you are anchored on what your investments were worth on that one day you are going to be pretty miserable for a while. And why be miserable?
You may have suspected markets were expensive, but you can’t know something before it happens. Or are you anchored because you were going to sell everything and spend it right then? Well, if you were going to be spending the money, it shouldn’t have been invested. You need at least a three-year time horizon to be invested.
The worst thing retirees can do is to anchor on an arbitrary number that they need in order to retire. They will spend the rest of their years trying to preserve the number at the expense of living the life they wanted by reaching that number.
Anchoring is really manifesting regret. You are anchored when you focus on something in the past that is causing you pain in the present.
Loosen the ties and anchors aweigh!
Related: Incentives Are Powerful, but They Can Also Pose Hazards