ANCHOR EFFECT

July 3, 2018

Last week my friend bought an apartment at 23% less than the market value, in that locality. How did he do it?

  

Two months ago, this friend was looking for an apartment in an upcoming suburb in Chennai, he said that the builder quoted a price of Rs 3500/-, adding that rates in a locality in between the city centre and this area was selling at Rs 7,000/-. Immediately my friend felt that just 4-5 kms further out gave him a 50% discount. What the builder had done was anchor my friend to the 7000 per sq foot price and any discount on that would seem attractive.

 

I asked my friend to look at it differently, i.e. I asked him to check the actual rates in that locality, in the terms of number of bookings happening and the availability of flats v/s sales. We found that due to demonetisation and introduction of GST, the real estate segment was sluggish. This meant that the earlier quoted high prices were no longer relevant. My friend was able to close this transaction at 2700/- per sq foot (also helped by the fact that my friend was able to complete the transaction in a week’s time).

 

Recently I faced a similar predicament at the car mechanic service. I was initially assessed for a service cost of Rs 20,000/-, but when I actually got the vehicle I was billed only 17,000/-. This was because many additional changes that were originally anticipated were not needed. Needless to say I was delighted and even gave the service a 10 star (meaning above expectation).

 

How did this happen? The mechanic had anchored me to a service charge of 20K and anything less than that seemed great.

 

In investing also, we get anchored to either returns or rates irrespective of the actual ground realities. The stock market is littered with countless investors who waited for their stock to touch Rs 500 before selling (while they could have sold it a plenty of times at 475 or 480 levels) before the stock lost the steam and has since not crossed even Rs 200. Similarly, investors look for double-digit returns in Fixed Deposits. They are anchored to a higher rate, notwithstanding the fact that those rates are now history, unless the investee company is taking very high risks.

 

So, while in investing it is okay to have a rate of return in one’s mind, just make sure that you are not ANCHORED to it and also consider other aspects relating to that investment before you commit your money. With this in mind, I am sure your INVESTING EXPERIENCE would be much better. 

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