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February 11, 2022

Where mental anchoring can really let you down

All of us carry sets of numbers in our heads that, without us realizing it, can weigh down our decisions.

One of the more common behavioral mistakes we make when it comes to investment decisions is the tendency to anchor to a certain value or price, says Carl Richards, author of The Behavior Gap: Simple Ways to Stop Doing Dumb Things with Money.

You pay $500,000 for your home, and a few years later you need to sell it. Well, you're damned sure you're going to get at least what you paid for it. Ok.

So, despite your agent's suggestion that accurate pricing works, you insist upon listing it for $500,000, even though the market value is likely less than that. You pass on offers around $485,000 and then ride the market all the way down to the point where you're just hoping to get $470,000 a year later.

And if you think that's something that only happens in the U.S., think again. Even conservative foerecasters see at least a 10% drop in housing prices.

The reality is the market doesn’t care what you paid for your house, Richards says. It doesn’t care how much you put in to it or what it cost you to landscape. All that matters is what it is worth today.

The key is to avoid the trap of anchoring to a single number and making it the primary guidepost for your decision, he maintains -- something to think about as real estate markets tighten up across the country.

Do you tend to fixate this way? Has it worked to your detriment in the past?

By Gordon Powers, MSN Money



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Gordon PowersGordon Powers

A long-time fund company executive, Gordon Powers now heads up the Affinity Group, a financial services consulting firm. Gordon was a personal finance columnist for the Globe & Mail for many years, has taught retirement planning...

Jason BucklandJason Buckland

The modern-day MC Hammer of money, Jason can often be seen spending cash that isn’t his with the efficiency of a Wilt Chamberlain first date. After cutting his teeth as a reporter for the Toronto Sun, he joined the MSN Money team with...