Month: March 2015

The Anchoring Effect

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In theory, consumerism is a basic concept. Whether it’s food, clothing or electronics, you decide what product you need and how much you are willing to pay for the good. Large items, such as houses, automobiles and recreational vehicles, have long been negotiable. Retail store goods, however, come at a fixed price. For years, consumers were tasked with deciding whether or not the good in question was worth that set cost. Retailers began using sales techniques to move products off the shelves for various reasons, ranging from boosting quarterly revenue to clearing space for the next year’s models.

As the retail industry evolved over the years, however, its marketing strategy became more sophisticated. Not only were retailers spending more money on advertising, but they also began capitalizing on their consumers’ cognitive spending biases. As a result, sales have increased to such an extent that it’s impossible to walk into a department store like Kohl’s or Macy’s without seeing sale prices on a large variety of items.

If you consider yourself a rather astute shopper, as I do, then you won’t allow yourself to be swayed by the immediacy of today’s sale on those shoes or long-sleeve tee, knowing full well that such a price will unlikely be limited to a one-time occasion. As it turns out, the illusion of a unique sales event is not as important as the concoction of a random original price. It doesn’t matter if Kohl’s never had any intention of selling that button-down dress shirt for $49. What matters is that the consumer fixates on that price first. Retailers have found that more people are willing to buy a $34 shirt if its marked down 30 percent from $49 than the same exact shirt originally priced $34 with no discount.

Say hello to the anchoring effect.

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Stay the Course: Nasdaq at 5,000

You may have heard the news last night or this morning that the Nasdaq composite index finished above the 5,000 mark for the first time in over 15 years and for only the second time ever. Big news, right? Maybe, maybe not. I believe stocks are a tool to be used primarily for long-term investments (5+ year horizon), so I have never been one to get caught up in the day-to-day, week-to-week swings of the Dow, S&P 500 or NASDAQ indexes.

The Nasdaq’s breakthrough on Monday is valuable in highlighting the stock markets’ role in your retirement portfolio. It’s also reminder to stay the course. So many people my age allowed their emotions to get the better of them in at least one of the market crashes over the past 15 years. Instead of taking the time to understand what the economic downturns actually meant, they pulled their money out at the worst possible time. Despite knowing the old adage to sell high and buy low, they did the opposite out of fear. Many are now blaming Wall Street for their languishing portfolios.

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