Part 4/8:
Kahneman also addresses the anchoring effect, which occurs when individuals base their estimates or decisions on certain reference points, even if those are unrelated or irrelevant. A common example is a stock's previous price influencing perceptions of its current worth.
For investors, anchoring biases can distort investment choices. A stock may seem appealing solely because it is significantly cheaper than it was months ago, despite an overall unfavorable outlook. To avoid falling victim to anchoring, investors must maintain a critical perspective and base decisions on comprehensive evaluations, rather than fleeting historical values.