This Day in History...

On October 10th, 2002, Daniel Kahneman is awarded the Nobel Prize in Economics, despite being a research psychologist, for his work in prospect theory. In a seminal study into anchoring bias in 1974, Kahneman and his research partners asked participants to guess how many African nations were part of the U.N. But they did it after spinning a wheel of numbers rigged to either land on 10 or 65. Higher anchors guessed a larger percentage than lower anchors. People (aka investors) often fail to fully analyze circumstances where they must make complicated judgments.
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Instead they follow rules of thumb over rational analysis. Kahneman’s work shows how otherwise perfectly rational folks are influenced by random factors to anchor on certain numbers. And even professional investors can fall prey to this, holding positions longer than they should trying to get back to break even or reach a certain arbitrary rate of return. The good news? Knowing that anchoring bias exists is the first step to limiting its effects on a portfolio. Which is the point...no one here is trying to win a Nobel prize. Then again, we wouldn’t refuse it either.