No matter how objective you feel like you are in making financial decisions, you’re making those choices from your own perspective. As with all decisions, it’s just about impossible to be completely objective.
The concept of anchoring is one that often enters into decision making. Anchoring influences how someone determines the value of a asset.
The anchoring value might be what the person paid for an asset, or it might be what the owner saw someone pay for a comparable asset.
This also draws in another concept that researchers in behavioral finance have explored. These researchers gave people several small objects that all cost the same. Then they asked the people to negotiate with each other to sell the objects. Pretty consistently, each person wanted more for the objects they owned than they were willing to pay for the objects the other people owned, even though the objects were all worth the same.
Here are a couple of examples of how this might work in your experience. Let’s say you bought your house for $400,000. You know your neighbors bought their house for $350,000 around the same time. They just got an offer on their house for $500,000. You’ve considered moving and now feel certain you can get at least $575,000 for your house. You assume that because you paid more for your house than the neighbors paid for theirs, that you could sell your house for more. Also, you believe your house is fabulous.
But what if your neighbors did updates prior to listing? What if you haven’t done a good job of performing regular maintenance on your home? Are you ignoring that your neighbors have a larger lot than you do? Realtors and appraisers generally have more insight into what a house will actually sell for and why.
While they might have different motivations than you do, their anchoring involves more public information than yours and they don’t have the same subjective sense of ownership that you do.
A different example might be how you view the value of an investment. You did some research and bought some stock at a discount brokerage. Now you’ve decided you’d like to get professional financial advice.
As part of the services, the adviser recommends you sell the stock so you can diversify your investments and because the stock isn’t a good long-term investment. But you’re certain that if you hold onto the stock, it will hit big one day.
In both of these examples, your biases might end up costing you money. Everyone has the right to do what they want with their money.
If they want to avoid making their decisions with expensive preconceptions, it can be helpful to consider what their blind spots are. And sometimes professionals can give some objectivity.
Linda Leitz is a certified financial planner. She can be reached at firstname.lastname@example.org.