Valuation-Informed Indexing #413: Investors Fall Victim to an Anchoring Bias When They Fail to Quantify the Effects of Overvaluation

I’ve posted Entry #413 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Investors Fall Victim to an Anchoring Bias When They Fail to Quantify the Effects of Overvaluation.

Juicy Excerpt: I no longer believe that the safe withdrawal rate is 3 percent or anything close to 3 percent at times of extreme overvaluation. But I wonder how many investors do believe something along those lines. Most investors never have to respond to questions about their beliefs put to them on internet discussion boards So most investors never formulate the thought that the safe withdrawal rate never drops much below 3 percent. But the vast majority of investors accept that Shiller showed that valuations affect long-term returns. So they know on some level of consciousness that the safe withdrawal rate cannot always be 4 percent. I believe that they employ anchoring to persuade themselves that, while the number cannot always be 4 percent, it is probably never too far off from that mark. They tell themselves something that isn’t true and that could hurt them in a very big way because they do not have immediate access to the information they would need to identify the accurate number and because they would feel uncomfortable not filling that gap in their knowledge even if they can only do so by making use of a discredited anchor.