anchoring (and investment psychology)

[3/23/06] Stephen Ellis discusses common biases investors struggle with.

[6/14/05] What goes up doesn't necessarily have to come down. And vice-versa.

The conventional wisdom among the pundits is to avoid the common person's pitfall of anchoring. In other words, don't be trapped by your past and wait to get that price you could have gotten.

But to me, that is exactly what you should be doing [assuming the story haven't drastically changed for the company - a hefty assumption]. According to the anchoring model, people won't sell until they get their price. So with the absence of selling pressure, the path of little resistance will lead back to that level.

Ritholtz admits that technical analysis is based on that concept (see also Terry Odean's articles somewhere on the net) of anchoring. I think his intent was to deride technical analysis. But I took it the other way.

[6/15/05] Are you normal about money?

[8/19/05] the pain of a financial loss is more than twice as intense as the pleasure of an equivalent gain

[6/15/05] More on investing and psychology