Anchoring Bias in Investment: When Relative Returns Obscure Absolute Gains

As the Head of Sales in a Mutual Fund in the past, my interactions with investors have been myriad and enlightening. One incident, in particular, underlines a common cognitive bias that many investors unknowingly fall victim to.

A disgruntled customer once approached me, claiming to have been misled by our staff. "I invested in Fund A, which yielded a 92% return. However, Fund B gave a 110% return. I was misguided," he lamented. The essence of his grievance was the notional 'loss' of 18%, although Fund A had given him a substantial return.

This incident sheds light on a classic example of the 'anchoring bias'. Human psychology is such that we rely heavily on the first piece of information we encounter (the "anchor") when making decisions. In this case, the investor's anchor was the higher 110% return from Fund B. Regardless of the impressive 92% gain he experienced, he couldn't look past the perceived 18% shortfall.

The world of investments is inherently unpredictable. Returns are contingent on a myriad of factors, and projecting future earnings with pinpoint accuracy is nearly impossible. It's crucial for investors to understand and accept this inherent uncertainty. Being fixated on relative returns can eclipse the satisfaction derived from absolute gains.

Having the right reference points is essential. A comparison is a natural human tendency, but it's vital to ensure these comparisons are constructive. Rather than juxtaposing one's gains with the highest possible alternative, it's more fruitful to compare them with average market returns or personal financial goals.

In conclusion, while it's human nature to seek the best and be influenced by relative performance, it's essential to develop a holistic view of one's investments. By setting appropriate benchmarks and focusing on the broader picture, investors can derive genuine satisfaction from their investment journey. After all, in the investment arena, perspective and mindset play as crucial a role as numbers and percentages.