From the course: Behavioral Finance Foundations

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Anchoring and investing

Anchoring and investing

From the course: Behavioral Finance Foundations

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Anchoring and investing

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- [Instructor] One of the most powerful phenomenon in investing is called anchoring. Anchoring means that people tend to see recent price levels as the fair price for their stock, and they ignore, or at least are slow to incorporate new information. So if a stock has been trading around $100 a share for the last year, that's the price that we tend to think of as a fair value for that stock. We don't take into account the fact that they announced great earnings last week, or that they did a transformative deal or something similar. So, for example, pretend that you own Roku stock and Tesla stock over the last few months. If Roku stock has risen from $100 to $200, and Tesla has fallen from $150 to $80, what do people do? Well they think, "Oh, Tesla's so cheap here. "It's definitely going to come back. "And Roku, well, it's gotten too expensive. "It's going to fall." And then they act accordingly, selling Roku, which is…

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