Definition
Anchoring is a cognitive bias where investors fixate on a specific reference point, often irrelevant, when making decisions. Common anchors include purchase price, 52-week high, analyst price targets, or round numbers. For example, refusing to sell a stock until it returns to the purchase price, even if fundamentals have deteriorated. Anchoring can lead to holding losers too long, missing opportunities, or inappropriate valuation. Successful investors focus on current and future value rather than historical anchors.
Example
An investor bought at $100. The stock falls to $60 on legitimate fundamental concerns. Instead of objectively reassessing, they anchor to $100, waiting to 'get back to even' while the stock declines further.
FAQ
What is Anchoring Bias?
Over-relying on the first piece of information encountered when making decisions.
Why is Anchoring Bias important?
Anchoring Bias helps investors evaluate behavioral finance and make more informed decisions.