A bias to watch out for while taking investment decisions

I have been writing to you about various biases that get inbuilt in the human mind. These biases impact the quality of decision making and hence the outcomes that define the quality of life. Even investment decisions are not insulated from biases. The Idea behind writing about these is to help discerning investors identify them and work upon them to improve the financial decision making thereby improving the investment journey.

- Ajit Menon

For instance, when faced with the choice of buying product A, originally priced at Rs.800 and now available at Rs.500, and another similar product B, that is priced at Rs.500 and available at Rs.500, most buyers are likely to buy the former. The thought process is that something worth Rs.800 is available at a discount so it must be a good deal. A critical thinker probably will look at it the other way round, thinking that if Product A is good why is it quoting at a discount? So why are most people likely to opt for product A? Predominantly due to what is known as “Anchoring Bias”. Anchoring bias normally occurs when people rely on pre-existing or the first information they find when making decisions.