Anchoring Bias: Why First Numbers Stick and How to Break Free

This is anchoring bias, and it is one of the most insidious cognitive shortcuts in investing.

What Anchoring Bias Is#

Anchoring bias is the tendency to rely too heavily on the first piece of information encountered when making decisions.^¹ In investing, this usually means fixating on a purchase price, a historical high, or the first price you noticed for an asset.

The research is clear: anchors affect judgment even when they are completely arbitrary. In famous experiments by Kahneman and Tversky, participants were shown a random number from a spinning wheel before estimating the percentage of African countries in the United Nations. Those who saw a higher random number gave significantly higher estimates, even though the wheel had nothing to do with geography.^²

In investing contexts, the anchor is rarely random. It is emotionally significant: the price you paid, the all-time high, the price a friend mentioned, or the figure you saw in a news headline. These numbers lodge in memory and become reference points for all subsequent judgments.

How Anchoring Affects Investment Decisions#

Holding Losers Too Long#

When an investment falls below your purchase price, anchoring makes it psychologically difficult to sell. The purchase price becomes the benchmark for success, not the current investment case.

Investors tell themselves: "I will sell when it gets back to break-even." But the purchase price is irrelevant to whether the investment is worth holding today. The question should be: "If I had this cash right now, would I buy this investment at its current price?" Anchoring prevents this question from even being asked.

Selling Winners Too Early#

Anchoring also works in reverse. If you bought at $30 and the price rises to $60, the anchor at $30 can make $60 feel like a huge gain that must be locked in. This leads to premature selling of investments that still have strong fundamentals and growth potential.

Professional investors call this "cutting flowers and watering weeds" - selling your best performers while holding your worst.^³

Misjudging Fair Value#

When analysing whether to buy an investment, anchoring on the current price or recent prices distorts fair value estimates. If a stock has traded at $100 for months and drops to $80, the $100 anchor makes $80 feel "cheap" - even if the fundamental value is actually $60.

Conversely, if a stock has traded at $20 and rises to $40, anchoring on $20 makes $40 feel "expensive" - even if the fair value has genuinely increased.

Why Anchoring Persists#

Anchoring is not a sign of poor analysis skills. It is a feature of how human cognition works under uncertainty.

When we lack confidence in an estimate, we start from an available reference point (the anchor) and adjust from there. The problem is that adjustments are typically insufficient.^⁴ We stay too close to the anchor, even when logic suggests we should move further.

This happens because:

Anchors are easy to recall. Your purchase price is salient information stored in memory. Fair value estimates require complex calculations.

Anchors feel objective. A price you paid is a concrete fact. A valuation estimate is inherently uncertain.

Adjusting from anchors is effortful. The cognitive work required to properly adjust away from an anchor exceeds what most people do in routine decisions.

Confirmation bias reinforces anchors. Once an anchor is set, we tend to seek information that confirms its relevance.

Evidence-Based Strategies to Reduce Anchoring#

Research suggests several approaches that can reduce the influence of anchoring on investment decisions.

1. Consider the Opposite#

Actively generating reasons why an anchor might be wrong reduces its influence.^⁵ Before making a decision anchored on a price, explicitly ask:

"What would make this anchor irrelevant?"
"If I had never seen this price, what would I estimate the fair value to be?"
"What has changed since this anchor was set that should update my judgment?"

This does not eliminate anchoring, but it weakens its grip by forcing consideration of alternative reference points.

2. Use Multiple Reference Points#

When a single anchor dominates judgment, deliberately introducing additional reference points can dilute its influence.^⁶

For example, instead of focusing only on your purchase price, consider:

The 52-week range
The average price over 3-5 years
Fundamental valuation metrics (price-to-earnings, price-to-book)
Analyst price targets (with appropriate skepticism)
Peer company valuations

No single reference point should dominate. The goal is to triangulate toward a more balanced view.

3. Start From First Principles#

Instead of adjusting from an anchored price, rebuild your estimate from scratch. Ask: "If I knew nothing about past prices, and only had today's fundamental data, what would I pay for this investment?"

This is cognitively demanding, which is why most investors do not do it. But for significant decisions, the effort is worthwhile.

4. Implement a "Fresh Eyes" Test#

Periodically review your portfolio as if you were seeing each holding for the first time. The question is not "Should I hold this investment I bought at $X?" but "Would I buy this investment today at its current price?"

If the answer is no, the investment should be sold, regardless of what you originally paid. Your purchase price is a sunk cost with no bearing on future returns.

5. Pre-Commit to Rules#

Written rules created in advance can override anchoring in the moment. Examples:

"I will rebalance when any position exceeds 10% of my portfolio, regardless of purchase price."
"I will not hold any investment that no longer meets my original investment criteria."
"I will review each holding quarterly on its current merits, not its history."

These rules create friction against anchoring-driven decisions.

6. Use Automated Systems#

Dollar-cost averaging and automatic rebalancing reduce the number of decisions affected by anchoring. When purchases and adjustments happen on a schedule regardless of prices, there are fewer opportunities for anchors to distort judgment.

When Anchoring Can Be Useful#

Not all anchoring is harmful. In some contexts, anchors provide useful discipline:

Stop-loss orders use price anchors to enforce risk management rules.
Target prices (when based on fundamental analysis) can anchor conviction through volatility.
Purchase price awareness helps with tax-loss harvesting and capital gains planning.

The problem is not anchors themselves. The problem is when irrelevant anchors override current analysis.

Recognising Anchoring in Yourself#

Common signs that anchoring is affecting your judgment:

You refuse to sell a losing investment primarily because you want to "get back to even."
You feel a stock is "cheap" mainly because it used to be higher.
You feel reluctant to buy something that has risen, even when fundamentals support the higher price.
Your analysis keeps returning to purchase prices rather than current valuations.
You feel more attached to round numbers ($50, $100) than to careful value estimates.

If you recognise these patterns, it is a signal to apply the countermeasures above.

Summary#

Anchoring bias causes investors to fixate on initial prices, purchase prices, or historical highs, distorting all subsequent judgments about fair value. This leads to holding losers too long (waiting to get back to break-even), selling winners too early (feeling like gains must be locked in), and misjudging whether investments are cheap or expensive. Evidence-based countermeasures include: considering the opposite (why the anchor might be irrelevant), using multiple reference points to dilute any single anchor, rebuilding estimates from first principles, implementing a "fresh eyes" portfolio review, pre-committing to rules, and using automated systems that bypass anchoring decisions. The goal is not to eliminate anchors but to recognise when they are distorting judgment and apply deliberate corrections.

Sources#

Tversky, A., & Kahneman, D. (1974). Judgment under uncertainty: Heuristics and biases. Science, 185(4157), 1124-1131. https://doi.org/10.1126/science.185.4157.1124

Kahneman, D. (2011). Thinking, Fast and Slow. Farrar, Straus and Giroux.

Lynch, P. (1989). One Up on Wall Street. Simon & Schuster.

Epley, N., & Gilovich, T. (2006). The anchoring-and-adjustment heuristic: Why the adjustments are insufficient. Psychological Science, 17(4), 311-318. https://doi.org/10.1111/j.1467-9280.2006.01704.x

Mussweiler, T., Strack, F., & Pfeiffer, T. (2000). Overcoming the inevitable anchoring effect: Considering the opposite compensates for selective accessibility. Personality and Social Psychology Bulletin, 26(9), 1142-1150. https://doi.org/10.1177/01461672002611010

Furnham, A., & Boo, H. C. (2011). A literature review of the anchoring effect. The Journal of Socio-Economics, 40(1), 35-42. https://doi.org/10.1016/j.socec.2010.10.008