Another irrational behavior in finance is called anchoring. Anchoring which was also described by Tversky and Kahneman, occurs when people make estimates by starting from an initial value. For example, in the Olympics, if two athletes competed in the 2010 games and one won a gold and the other won a bronze, then they both won silvers in 2014, the athlete who dropped from gold to silver might be more unhappy than the athlete who improved from bronze to silver.
Notice in the the chart below, there may be different feelings about holding or selling silver today based upon the price of purchase. However, the irrational behavior is that it shouldn’t matter what the purchase price was considering the decision going forward to buy, hold or sell should be based on today’s price in relation to the future and not the past. An investor that bought silver in Oct 2008 may be feeling regret that s/he did not sell at the high in April 2011, and rather than being happy over a 125% gain is feeling upset over a 55% loss. On the other hand, if an investor bought at the beginning of 2014 and has gained 13%, s/he may be feeling elated, and that of course is only if s/he is not sorry to have missed out on coffee.
Source: S&P Dow Jones Indices and/or its affiliates. Data from Jan 1973 to Feb 2014. Past performance is not an indication of future results. This chart reflects hypothetical historical performance. Please see the Performance Disclosure at the end of this document for more information regarding the inherent limitations associated with backtested performance.
About Jodie Gunzberg
Jodie M. Gunzberg is vice president at S&P Dow Jones Indices. Jodie is responsible for the product management of S&P DJI Commodity Indices, which include the S&P GSCI® and DJ-UBS Commodities Index, the most widely recognized commodity benchmarks in the world. Both indices represent the global commodity market and are most commonly used for the historical benefits of inflation protection and diversification to stocks and bonds.
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