Anchoring bias is the tendency to lean too heavily on the first number you see — the anchor — when making a judgment, even when that number is irrelevant. Tversky and Kahneman documented it in 1974: people stay close to whatever figure they were shown first, adjusting away from it too little.
In investing, the most common anchor is your own purchase price. "I'll sell once it gets back to what I paid" is anchoring: the market has no memory of your cost basis, and a stock's future has nothing to do with what you happened to pay. Other anchors are a 52-week high or an old analyst price target — each can keep you holding a weak position for reasons that have no bearing on the business today.
Evaluate a position on its forward prospects: if you had cash today and no history with this stock, would you buy it now? If not, your purchase price should not keep you in. Naming the anchor out loud often breaks its grip. Watch for confirmation bias, which travels with anchoring — once anchored, you look for reasons the anchor is right.
It is the tendency, documented by Tversky and Kahneman in 1974, to lean too heavily on the first number you see and adjust away from it too little — in investing, often your own purchase price.
It keeps people holding a weak position until it 'gets back to what I paid,' even though the market has no memory of your cost basis and the stock's future does not depend on it.
Ask whether you would buy the position today with fresh cash and no history. If not, your purchase price should not keep you in — judge it on forward prospects, not the anchor.
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Educational research only — not investment advice.