Anchoring bias is the cognitive bias of relying too heavily on the first piece of information encountered when making decisions. This "anchor" becomes a reference point that disproportionately influences subsequent judgments, even when the anchor is irrelevant to the decision.
The Purchase Price Anchor
A classic example: you buy a stock at $80. It falls to $60. Now the question is whether to sell. A rational investor evaluates: based on current fundamentals and future prospects, is $60 a good price? Is the company's outlook improving or deteriorating?
But anchoring bias distorts this. The $80 purchase price becomes an anchor. The stock "should" be worth $80. Selling at $60 "locks in a loss." This anchor is irrelevant — the market doesn't care what you paid. But psychologically, it dominates the decision.
Research shows that anchors influence valuations even when investors know the anchor is irrelevant. If you tell someone a stock was just valued at $100 by an analyst (even if that analyst is later shown to be nonsensical), it influences their valuation of that stock upward — the $100 becomes an anchor.
Real-World Financial Examples
Salary negotiations: If an employer suggests a starting salary of $60,000 and you counter with $75,000, the $60,000 anchor still influences the negotiation. Most negotiations end somewhere between the two — not because that's what you're worth, but because the anchor moved the center point.
Home purchases: A house is listed at $500,000. This price becomes an anchor. Offers cluster around it — $480,000, $495,000, $520,000 — even if a rational appraisal suggests a $420,000 fair value. The listing price anchors all negotiations upward.
Valuations: A stock is trading at $50. An analyst issues a $55 price target. Immediately, $55 becomes an anchor — it's the "fair value" many investors reference. But the analyst might be anchored to outdated information. The current $50 price might be more rational than the $55 target.
Overcoming Anchoring
The antidote is deliberate evaluation without reference to anchors. Before checking your stock's purchase price, analyze: based on current news, earnings, and competitive position, what is this company worth? Then check: what did I pay? If the answer is "I paid too much," that's information about your past judgment, not guidance for your future decision.
The goal is making decisions on merit, untethered from irrelevant anchors.
