We're spending some time looking at the major behavioral biases that we bring to bear whenever

we're investing and how they can very often hold us back from being successful investors.

Today we're going to talk about anchoring. Now anchoring is one of those things that isn't necessarily bad in and of itself, but sometimes it can lead to, shall we say, less than optimal outcomes

when we're investing.

So let's talk a little bit about that today and put five minutes on the clock down here.

Say a quick thank you to my friends at 7M for continuing to sponsor the show

and let's crack on.

Let's look at an example of anchoring so that we can really understand what it is and how it works.

Probably the classic example is where we might own a share in a company and we value that share based on what we paid for it as opposed to what it's actually fundamentally worth.

So let's say we bought some shares in Widgets Limited for 50 pounds a share

because we've been watching it and we can see that its share price has been rising

quite strongly recently. who knew after we

bought it the share price plummets by half down to 25 pounds a share but we hold

on to it because well you know we paid 50 quid a share for it and not only do we not really want to take a loss,

but we firmly believe that it's worth 50 pounds a share because it was rising very strongly,

so this is likely just a temporary setback. The price we bought it at is quote the right price or at least we believe so.

And it'll come back before too long. But in fact, Widget Limited's biggest customer has just declined to renew its purchasing contract,

so its revenues are going to go down by 60%.

So in light of that, the halved share price kind of makes sense.

By the way, this is why I never recommend buying. halved share price kind of makes sense.

By the way, this is why I never recommend

buying shares in individual companies.

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