Caravaggio`s anchor

In a guest column in the Indian Business Standard, Mukul Pal from New Delhi, who heads a global alternative research company, takes inspiration from Caravaggio in Malta to compare art with the stock markets:

Investors not only use psychological anchors to price assets but they also overestimate individual capabilities. Standing at the cathedral of Saint John?s at Valletta in Malta, I was watching Caravaggio's masterpiece, 'The Beheading of St John the Baptist'. The painting is considered the first modern tragedy painting. The 16th century artist was lost in notoriety till the time he was recognised 300 years later in 1920s. Standing there thinking about art, expression, poverty of an artist and the economics around it left me a bit confused. Dying in poverty and being worth millions in an after-life can only happen in this modern world.

Pricing an art work or a stock is similar. Markets work on pricing anchors on both individual and group levels. And recent studies have come to the conclusion that anchors are psychological biases, which are more inaccurate than accurate. We as a group and individual have a strong tendency to price assets on pre-conceived basis. In short, pricing is always more sentimental than rational. Daniel Kahneman, the father of behavioural finance, talks about anchors in his award-winning work. Anchoring according to him is a cognitive bias that describes the common human tendency to rely too heavily, or "anchor" on one trait or piece of information when making decisions...