What Is Anchoring Bias?
Anchoring bias, first documented by Tversky and Kahneman in 1974, describes the human tendency to fixate on an initial reference point (the 'anchor') and insufficiently adjust away from it. In investing, a common anchor is the price at which you bought a stock. If you purchased shares at $100, you may irrationally wait for the price to return to $100 before selling, even when fundamentals have deteriorated. Experimental studies show that arbitrary anchors can shift valuation estimates by 20-40%.
How Anchoring Affects Investment Decisions
Analysts are not immune. Research published in the Journal of Behavioral Finance found that sell-side analysts whose prior price target was $50 tended to set new targets closer to $50 even when updated fundamentals justified a significantly different figure. Individual investors anchored to a stock's 52-week high are roughly 15% less likely to sell at a loss compared with investors who focus on intrinsic value. This overlap with the disposition effect can lead to portfolios loaded with underperforming positions.
Key Considerations
To counteract anchoring, use a structured valuation framework such as discounted cash flow analysis rather than relying on gut feelings tied to past prices. Regularly re-evaluate holdings based on forward-looking metrics. Writing down your investment thesis at the time of purchase and reviewing it periodically helps you recognize when the original anchor is no longer relevant.