Anchoring

For those old enough to remember the Mary Tyler Moore show, you will recall her neighbor and friend Rhoda Morgenstern.  In one episode, Rhoda’s father came to visit and explained that he has had some “business reversals.”  Rhoda was surprised to find him spending money on her and asked about his business reversal.  His explanation:

“I have had a reversal.  Before now, things weren’t very good.”

rhoda-morgenstern1-533x400A similar response happens at tax time.  The idea of having suffered a profit is common.

Funny how everyone thinks of business reversals and risk as being necessarily bad.  We are addicted to fear because fear sells and there are a great many people who want to sell something.  In business, there is always the included risk of success, yet few notice it except as a greed response.

Fear is usually an uninformed reaction to a situation that is not fully predictable.  I suppose greed is too.    Knowledge is the antidote to fear, but not easily acquired.  So we fall victim to the person with an easy to implement solution to an ill-defined and possibly irrelevant emotion.  That approach contains the seeds of failure.

We can do better with just a little more effort.  In psychology anchoring means connecting to the first idea as a basis for future comparisons. The fertile way forward is to avoid that.  It is difficult to get a useful assessment of a situation if you are connected to one belief and see all other possibilities from there.

Capable managers look at opportunities from several viewing points.  They know that marketing people, engineers, finance, production managers and personnel will all see things differently.  Frequently with almost no commonality.  Truth lies in the amalgam of ideas, but individuals are seldom exposed to that sort of process.

Capable managers are not right every time but they understand their decisions better and that allows the second best outcome.  They can tell when to quit sooner than others.  Quitting early when you are wrong and letting winners run is a way to great wealth.  There are some managers who can say, “I have been wrong many times and only right a few times and yet it works out.”

As Warren Buffett has pointed out many times, the first key to making money is not losing money.  You can do that best by learning more about any proposition presented to you and exploring from several viewing points and estimating is results over a long time.  Important too, is knowing what happens if you start and later decide to quit.

Don Shaughnessy is a retired partner in an international public accounting firm and is now with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.

Contact: don@moneyfyi.com

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