Trading Psychology | Anchoring Bias – I Refuse to Change My Mind!

Anchoring and adjustment is a psychological heuristic that influences the way people intuit probabilities. Traders exhibiting this bias are often influenced by their initial opinions, the initial trend, or arbitrary price levels such as their entry or target prices – and tend to cling to these numbers when making their buy/sell decisions.

 

Anchoring Bias – I Refuse to Change My Mind!

 

This is especially true when the introduction of new information regarding the security further complicates the situation. Rational traders treat these new pieces of information objectively and do not reflect on purchase prices or target prices in deciding how to act.

Anchoring and adjustment bias, however, implies that investors perceive new information though an essentially warped lens. They place undue emphasis on statistically arbitrary, psychologically determined anchor points. Decision making therefore deviates from neoclassically prescribed “rational” norms.

For example, traders who are anchored to the initial trend are slow to catch on when the trend has reversed, especially if they are caught on the wrong side of it. This will lead to a reluctance to change their view and reverse their positions.

How will this affect your trading?

The key to overcoming this bias is to be flexible and objective, being able to evaluate prices and make decisions objectively, whether you are in, out, up or down.

Cheers
Spencer
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Spencer Li is a trader, investor & entrepreneur who achieved financial freedom at 27 (2013), having to date accumulated a diversified portfolio of properties, stocks, REITs, and 10+ businesses across different industries. As a professional trader, he has over 10 years of market experience, and has been featured on more than 20 occasions in the media.

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