info@rpgcfp.co.uk

01745 582 933

News

Does anchoring bias affect your financial decisions?

by RPG Chartered Financial Planners

Anchoring bias is a common cognitive phenomenon that could affect your day-to-day and long-term financial decisions. The good news is that there are ways you could minimise the effect of bias, including anchoring. 

First, what is a financial bias? The term refers to mental shortcuts and errors you might make when processing financial information that may lead to “irrational” decisions that don’t align with your long-term plans. There are many different types of financial bias, so read on to find out more about anchoring bias and how to minimise the effect. 

Anchoring bias occurs when you focus or rely too heavily on a single piece of information when making financial decisions. It’s a bias that could lead to you dismissing other relevant data or it could skew your perceptions when you’re assessing a financial opportunity.

By “anchoring” your views to certain data, you could make decisions that aren’t right for you. 

Anchoring bias could affect your short- and long-term finances

Anchoring bias could affect your financial decisions in several ways.

When it comes to your day-to-day spending, it might affect how you view the price of items. Let’s say you’re searching for a new TV and you find one you want priced at £1,000. You don’t make the purchase right away, and a few weeks later you see the same TV is now £800. 

If you anchored the value of the TV to the first price you’d seen, the new, lower price might seem like an excellent deal. Yet, if you did some further research, you might find it was overpriced at £1,000 and it’s cheaper elsewhere. So, if you acted impulsively and purchased the TV when you saw it was £800 it might not be the bargain you first think it is.  

Similarly, anchoring bias could affect long-term financial decisions too. 

For instance, investors might purchase stock because they believe it’s a “good” price as they’ve anchored their view of it to a particular piece of information that suggests it should be higher. Alternatively, investors might hold on to assets that are no longer right for them because they believe the value will rise despite market conditions suggesting otherwise.

In short, anchoring bias could mean your investment decisions are based on an attachment to a certain piece of information, which might not reflect reality. It could lead to missed opportunities and poor decisions. 

5 practical steps that could help you reduce the effect of anchoring

1. Be aware of the effect of anchoring bias

Often, the first step to reducing the effect of anchoring bias is simply to be aware of the effect it could have. Recognising that you may judge financial opportunities based on a single piece of information could give you pause enough to reconsider your initial thoughts before you act. 

2. Assess the credibility of sources

There’s so much information available that it can be overwhelming. So, taking some time to assess how credible a source is could help judge whether it’s information you want to use when making financial decisions.

It’s not just the credibility of the source you may want to weigh up either. For example, reviewing when the information was released could be just as important – basing an investment decision on the price of a stock a year ago could mean you’re overlooking more valuable, recent figures. 

3. Carry out further research

In addition to reviewing key pieces of information you already have access to, carrying out further research is often useful.

Let’s say you’re making a large purchase for your home, you’ll often shop around to see which retailer is offering the best deal. Taking the same approach for other financial decisions could also help you make better decisions for you. 

4. Focus on your long-term plans

Focusing on your long-term plans or budget could reduce the chance of you acting on impulse because you’ve seen what seems like an excellent opportunity at first glance.

Whether a retailer has cut the price of that TV when compared to your anchor or the latest technology company’s shares are falling, take a step back and ask if it fits into your plans – is this potential opportunity right for you and how would it affect your finances? 

5. Work with a financial planner

Sometimes an outside perspective could help you see where financial bias, including anchoring bias, could be clouding your judgement. As a financial planner, we’re here to work with you to create a long-term plan that considers your aspirations. Having a plan that’s been tailored to you could help you reduce the influence of bias and make better financial decisions for you.

Please contact us to talk to one of our team or arrange a meeting.  

Please note:

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. 

Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.

Newsletter

    Please read our Privacy Policy.

    What our clients say

    The majority of my time has been spent running a business and concentrating on making the correct day-to-day decisions; it was essential for me to gain advice and guidance. Phill and his team at RPG have been able to guide me and provide a balanced portfolio. Without turning to RPG, I would have been unable to arrange my long-term financial future. They have a vast amount of knowledge and have produced the results essential for when I decide to retire.

    John S, Shropshire

    Director

    Because our business was growing every year, we didn't really look at how the money we were making was put to best use. We needed some expert advice to lead us in the right direction. Anthony O'Connor has always been very helpful and approachable whilst dealing with our affairs. We are left to do what we do best: run a business. We would highly recommend anybody who is seeking financial advice to look at the services Anthony and his team can provide.”

    John and Carole, Cheshire

    Business owners

    We decided to use Phill Owen to help us with our financial planning as our savings, mortgage and life policies did not seem coordinated. Phill provided a clear plan for the future. He helped us organise our wills, inheritance matters and our future retirement. With our face-to-face catchups and regular emails or phone calls, Phill has always given us sound advice. This, in turn, has given us the peace of mind that our financial matters, now and in the future, are in good hands and in good order.

    Nick and Christine, Shropshire

    Retired Dairy Consultant and Retired NHS Therapist

    I started using RPG on the advice of my bank when I started my own limited company. They have guided me through potential pitfalls in such a friendly manner that, even though our relationship has always been professional, I still consider them as friends. This journey has gone through setting up my company, tax, VAT, insurance advice, setting up wills, buying a different house and ensuring my wife and sons are provided for, both now and in the future. It has been such an easy journey. I would have no hesitation in recommending them to anyone.

    John M, Manchester

    Aircraft Engineer

    My wife and I have been clients of Phill's for 25 years; 20 of which were with RPG Chartered Financial Planners. 17 years were prior to retirement and nine years have been post-retirement. Their involvement has been crucial to dissipate our financial and estate management concerns. RPG’s staff have been exemplary; always approachable and quick to respond. We have no reason to believe that this tremendous working relationship will not be as successful in the future as it has been in the past. We have no hesitation in recommending them.

    Paul and Pat S

    Retired Veterinary Surgeon and Retired College Lecturer

    I am a Chartered Structural Engineer and have very little knowledge, experience or understanding of financial affairs and investments. Approximately six years ago I started to think about early retirement. For the past six years RPG have provided excellent financial planning and tax-efficient advice in the form of a combination of pension and cash ISA investments, which have grown significantly to such an extent that early retirement is imminent.

    Pete, Manchester

    Chartered Engineer

    Early in 2000, we decided we needed financial advice. We contacted Phillip Owen, who created a financial planning strategy that addressed all our needs. We were impressed with his advice, and so a partnership began that has lasted. Original goals are still being met and often exceeded, and investments are successful. There is long-term financial planning in place, even for the youngest family members. I highly recommend Phill and his team.

    Mike, Westminster

    Retired Teacher and Volunteer Sector Adviser

    We were in need of an adviser who could provide a wide spectrum of advice for managing our portfolio. We met Anthony on several occasions to understand his breadth of experience, and we were very impressed. Anthony's team took the reins in consolidating and rationalising our portfolio. We are very pleased with Anthony's service and we look forward to a long-lasting relationship with him.

    Atul and Nita, London

    IT Consultant & Accountant

    Anthony O’Connor has advised me over several years about pensions and general financial planning.  I have found him knowledgeable, supportive and a person who provides good solutions . He has a “can do “ approach and makes things happen.  I have recommended him to a number of friends and they are all happy with his support and advice  He is always good humoured which is a good quality when planning ones financial affairs.

    Geoffrey Smith, Manchester

    Solicitor

    Get in touch

      Please read our Privacy Policy.