Anchoring is a cognitive bias that shifts perception toward a reference point (the
anchor). When evaluating an investment performance, people tend to continuously compare their returns with the stock market at large, or, more precisely, with the index commonly quoted by medias, such as the
S&P 500 or the
Dow Jones Industrial Average. To address this, the V2 ratio divides the excess return of an investment by the quadratic mean of the relative drawdowns. The relative
drawdown compares the loss in value of the investment since its previous peak with the loss in value in the benchmark. For instance, if an asset is down 30% since its peak while the market at large is down by 25%, then the relative drawdown is only 5%. The perception of the poor performance of the asset is somehow mitigated by the overall loss of the market. Taking the
ulcer index as a direct inspiration, the V2 ratio uses a
quadratic mean of the relative drawdowns to over-penalize large swerves, as investors are more likely to liquidate the asset or abandon the strategy when facing such large relative losses. == Properties ==