Don’t get anchored to round numbers

Jayant Pai | jayant@ppfas.com                                                                                                                   

It is perplexing to observe the penchant for round numbers amongst investors, depositors, etc.

Here are a couple of examples :

  • In my weekly show which appears on one of the business channels, many of the viewers saving up for retirement, want to accumulate a corpus of Rs. 1 crore by the time they are 60 years. This is irrespective of their current age. Thus a 30 year old may have the same desire as a 50 year old.

The fact that the present value of Rs. one crore (which is, well….one crore) will be much higher than that in the year 2021 or 2041 is often overlooked.

Recently, anchors on several business channels have heaved a sigh of relief that “psychologically important” support levels for the Sensex and Nifty have not been breached. These usually coincide with round numbers such as 16000 or 5000 respectively. I wonder what mayhem might break loose in case these levels are actually breached. Maybe we will hurtle down to the next round figure. But then again….maybe we will not.

Similarly we have witnessed jubilant scenes when the Sensex crossed such round figures on the way up. Alas, rarely has it moved up linearly to breach successive levels in quick succession. Such developments, while intriguing, are not predictable, to say the least.

Now, a friend of mine has decided to indulge in some “value buying” (in his words) when the Sensex touches 16000. He is unwilling to buy at the current level of 16800 odd, since he is fixated on entering at 16000. Time alone will tell whether his desire will be fulfilled or not.

So why do we cling to such round numbers? Let me hazard a few guesses:

They are a soft target : As a general rule, humans are attracted to order and structure as opposed to vagueness. Round figures serve as straws that we can cling to, especially when we are dealing with future goals, which are nebulous. For instance, when a 25 year old is contemplating upon her retirement corpus required at age 60, a nice round figure helps. For today’s youngsters “lakhs” do not command the same aura as that for their parents. Hence they move on to the next figure that is “crores” and one crore seems to be a suitable figure. For older people, closer to retirement, it may be an escapist tool as the thought of higher figures (say Rs. 4.25 crores) may appear too daunting for them to even try to accumulate.

They are catchy:Imagine someone asks you for the value of the stockmarket index and you say 16914.56 or 5041.25. They may give you a strange look. People prefer 16900 or 5050 even though it may not be perfectly accurate. The media understands this very well. However, they tend to go overboard at times, making viewers focus unduly on the next upcoming round figure.

Similarly when financial planners attempt to convey the corpus required at a future date they round it off so that the client gets a basic idea. Besides, every forecast involves assumptions which will change as time progresses hence pin-point accuracy may not really be called for. But I feel that an in case an advisor prefers to round it off they should do it to the higher round number so that the client’s expectations are better managed.

Prima facie, getting anchored to a round number is not a great sin. In fact it can be a great motivator at times if it is enticing enough for you to have a go at. Just avoid getting fixated on it to the exclusion of everything else….

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This article appeared in ‘Business Standard’ newspaper on 30, November 2011

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