Don't get anchored to round numbers

It is amusing to observe the penchant for round numbers among investors, depositors, etc. Here are a couple of examples. Many investors want to accumulate a corpus of

Rs 1 crore by the time they reach the age of 60, 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 1 crore is much higher than what it will be 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 16,000 or 5,000, 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, although 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 16,000. He is unwilling to buy at the current level of 16,800, since he is fixated on entering at 16,000. 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, people are attracted to order and structure as opposed to vagueness. Round figures serve as straws that we can cling to, especially when 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 “lakh” does not command the same aura as it did for their parents. Hence, they move on to the next figure that is “crore” 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 crore) may appear too daunting for them to even try to accumulate.

They are catchy: Imagine someone asks you for the value of the stock market index and you say 16,914.56 or 5,041.25. They may give you a strange look. People prefer 16,900 or 5,050 even though it may not be 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, in case the advisors prefer 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 sin. In fact, if it is enticing enough, it can be a great motivator. Just avoid getting fixated on it to the exclusion of everything else.