Anchoring Bias and Investment Behavior | Personal Capital
Must be a valid email address.
Password must be 8-64 characters.
Must be a valid phone number.
Recession incoming? Here’s how you can prepare.
Daily Capital
Home>Daily Capital>Investing & Markets>That’s So 2008 – Are You Suffering From the “Anchoring” Effect?

That’s So 2008 – Are You Suffering From the “Anchoring” Effect?

When you think about investing, what do you use as a reference point?

Many investors use the Great Recession of 2008 as their reference point due to the financial turmoil it caused and they make future financial decisions based on this perspective.

Because of this crisis, millions of jobs were lost, the housing market collapsed and trillions in investable assets disappeared. Although the effects from this were felt for many years following, the U.S. economy has largely recovered. The stock market has been on a nine-year bull market run and housing is back (or mostly so) across the country.

But have you recovered psychologically?

The psychological effects of the Great Recession will likely last long after the actual economic impact is a distant memory. In fact, you could be impacted by the events of 2008 for the rest of your life—unless you actively work to fix your skewed perspective.

Why? Because of a little mental hiccup called “anchoring.”

Anchoring & Your Financial Behavior

Like all humans, you’re prone to thought processes that include some significant weaknesses. One of those weaknesses, which is particularly relevant to investing, is called anchoring. Humans are prone to put too much emphasis on an early piece of information, such as the 2008 financial crisis, and then make all future decisions from that point of reference.

The Great Depression is an extreme historic example of the lasting impact of anchoring. In many instances, the results of this economic destruction invaded the thoughts and habits of an entire generation—governing important aspects for their lives forever. Many of us can see the results in the lives of grandparents or great grandparents, who “pinched pennies” for a lifetime or never threw anything away because “you never know when you might need it.”

The Great Recession has a similar anchoring impact on many of today’s investors. During this crisis, some people couldn’t find work, some lost all the equity in their homes (or lost their homes), and others watched their retirement nest eggs wither. No wonder this crisis became the latest generation’s anchoring effect.

If you use the Great Recession as your anchor point, you may be excessively risk averse and prone to extreme worry about equity markets or other investments. Unfortunately, this anchor point could inadvertently be hindering your ability to adequately build your investment portfolio.

What Should You Do?

First, recognize anchoring for what it is—a psychological hiccup, not your current reality. Think about this: If you had missed the Great Recession, what point of reference would you use? The seemingly endless bull market? Housing bargains everywhere? With that perspective, you might become a highly aggressive investor willing to take a chance on just about anything—which could also become a problem.

The key is to remove any emotionally charged baggage, such as an early anchoring event, from your evaluation process. Instead of making investment decisions using a specific reference point—and building in an unwarranted bias—focus on your long-term goals. Then do all you can to improve your chances of investment success using the following criteria:

  • Determine your optimal financial plan based on your objectives
  • Develop an asset allocation guided by your risk tolerance
  • Make regular contributions at the highest level you can afford
  • Avoid chasing the next random payoff or running from perceived disasters
  • Stick with your strategy

Our Take

It may be so 2008 – but the Great Recession could still be influencing how you invest. It’s humbling to think that your thought processes might bias your ability to maximize your investment opportunities, but we all should acknowledge this blind spot to help overcome this bias.

Learn more about recency bias and how it fits into your overall financial strategy by reading our free Personal Capital Investor’s Guide to Volatile Markets.

Download Guide

The content contained in this blog post is intended for general informational purposes only and is not meant to constitute legal, tax, accounting or investment advice. You should consult a qualified legal or tax professional regarding your specific situation. Keep in mind that investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money.

Any reference to the advisory services refers to Personal Capital Advisors Corporation, a subsidiary of Personal Capital. Personal Capital Advisors Corporation is an investment adviser registered with the Securities and Exchange Commission (SEC). Registration does not imply a certain level of skill or training nor does it imply endorsement by the SEC.

Amin Dabit is the Vice President of Advisory Services at Personal Capital. Amin brings over a dozen years of experience in private wealth management and financial planning. Amin leads Personal Capital's advisory team to identify and establish strategies for reaching clients' financial goals by providing comprehensive, customized financial advice designed to improve their financial lives.
Icon Close

To learn what personal information Personal Capital collects, please see our privacy policy for details.

Let us know…

This year, my top financial priority is:

Building my emergency fund
Paying off high-interest debt
Budgeting better
Saving for a short-term goal, like a vacation or new car
Increasing my investment contributions
Maintaining status quo - I’ve got this under control

Make moves toward your money goals with Personal Capital’s free financial tools.