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In Stock Market, investors compare the recently known past with a given market situation or price to draw broad conclusions. In this process, more distant history loses relevance. A consequence of anchoring is under or over reaction. Impact of good or bad news becomes exaggerated.
May be this explains optimistic and pessimistic market moods, generating euphoria or despair.

2. The Status Quo: Keeping On Keeping On

You inherit 100 shares of a blue-chip stock that you would never have bought your self. (For example Reliance, Again Anchoring!) You can sell the shares as they have appreciated considerably. What will you do?

When faced with this situation, a surprising number of people hold on to the inherited shares. They find the status quo comfortable and they avoid taking action that would upset it. Many psychological experiments have shown the magnetic attraction of status quo. In one, a group of people were randomly given one of two gifts - half received a decorated mug, the other half a large Swiss chocolate bar. They were then told they could effortlessly exchange the gift they received for the other gift. You might expect that about half would have wanted to make the exchange, but only one in ten actually did. The status quo exerted its power even though it had been arbitrarily established only minutes before.

3. Sunk-Cost: Protecting Earlier Choices

We tend to make choices in a way that justifies past choice. We may have refused to sell a stock or mutual fund at loss, losing other more attractive investments. We may have put enormous efforts into improving the performance of an employee whom we know we should not have hired in the first place. Your decision influences only the future, not the past. Investors are unwilling, consciously or not, to admit to a mistake. Investors are adverse to making public admission of poor judgement. It relates to not only the person's self esteem, but it may invite critical comments or negative assessments from friends, family members, colleagues, or bosses. It seems psychologically safer to hang on to a bad decision, even though it will compound the error.

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Prof. Gangineni Dhananjhay is Assistant Professor - Finance in the M.B.A. Department at Vivekananda School of P. G. Studies, Hyderabad.