Behavioural bias: “Averaging down” vs. “averaging up”

Sometimes it makes sense to reflect why one has done something and why not.

Following my “boss Score harvest” project, I invested in two new UK stocks this year, Dart Group beginning of June and Cranswick in Mid June.

In September I increased the Cranswick position to a full position, for Dart however I was hesitant and could not decide to increase .

One doesn’t need to be a genius in order to find out that increasing the Dart position would have been better:

Since mid of September, Dart made 50%, against more or less flat performance for Cranswick. If I look back to September, I think one of the “true” reasons why I didn’t increase Dart was that I would have to “average” up on Dart, as the stock was already 20% up against my purchase price.

For some reason I am much more hesitant to buy at higher prices. So for Cranswick, it was easier to increase the position because I could slightly decrease my average purchase price. Somehow I seem to prefer lowering the percentage loss on a loss position (“averaging down” than to lower the percentage profit of a gain position (“averaging up”).

I am not sure if this fits into the standard behavioural biases, maybe it is a special form of “anchoring”.

This behavioural bias, not increasing the Dart stake cost me around 1% of portfolio performance so far and now I am even more hesitant to buy. It is also in direct contradiction to the fact that “momentum” combined with Value seems to generate strong results in the long run as demonstrated by O’Shaugnessey’s “what works on Wall Street”.

Lessons (hopefully) learned:

In the future I need to have a better formulated plan for scaling into a position in order to avoid this “behavioural bias”. Either a clear timeline or some clear fundamental triggers where I then execute regardless if the position has already increased to a certain extent or not.


  • ltinvestment

    Can you share your scaling methods?
    “In the future I need to have a better formulated plan for scaling into a position in order to avoid this “behavioural bias”. “

  • It offends my value sensibilities, but I’ve become increasingly convinced over the years that I’ve made far more money averaging up, rather than averaging down.

  • Hi MMI,

    yes, I’d certainly book this as “anchoring”.

    I think anchoring happens everytime when the price level of a past decicion (that was “anchored” in your memory) enters into a current decision.

    Actually I fight with the same problem when I first reject a certain stock at time t because of low relative strenght / no clear uptrend and later hestitate to buy it at t+1 because it doubled already from the low it hit at t.
    Happened frequently the last weeks with many PIIGS stocks on my watchlist.

    I sometimes buy/sell half positions to trick my inner psychology, b/c then I am at least partly happy in both upswing/downswing cases.

    Also I switched to look much less at my current portfolio performance but only at the remaining upside in my pricing tool, as I noticed that the anchoring effect gets stronger the more often you look at the figures.
    This is a great way to avoid anchoring, as in the best cases over time I even forget at what price I bought a stock…


  • Well, MMI, you still did much better than I managed. I was waiting for 66p when it was at 72p. It never came down and I missed out completely.

    Some further thughts with respect to possible behavioral biases in relation to Dart vs. Cranswick:

    1. Cranswick was far less undervalued than Dart; the more undervalued a stock the more one is apt to doubt oneself and to hesitate. (Cranswick is now fully valued, in my view; Dart’s value is now somehwat complicated by management’s false, laughable & disingenuous claim that they could make up for the possible loss of the Royal Mail contract with “growth”).

    2. Cranswick is “backed by tangible assets”, whereas Dart isn’t so much. Investing in equities priced below net tangible asset value is most people’s instinctive idea of conservatism.

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