Anchoring Bias
Anchoring bias is the tendency to rely too heavily on the first number or piece of information you come across, and to judge everything after it relative to that reference point. In investing, the anchor is often a purchase price, a past high, or a return you once earned.
The question that matters is "Is this the best place for my money today?" Anchoring replaces it with "Is this above or below the price I paid?", which the market does not know or care about.
How anchoring shows up in investing
Holding a stock or fund until it returns to the purchase price, even when the original reason for owning it no longer holds.
Treating a stock as cheap because it is 40% below its peak. The old high is not a measure of value, and the business may have changed.
Believing a fund with a NAV of ₹10, or a new fund offer, is cheaper than one with a NAV of ₹500. A fund's NAV level says nothing about whether it is cheap or expensive.
Expecting the 30% to 40% returns of an exceptional year to repeat, and treating normal long-term returns as a disappointment.
Refusing to sell a property below a figure quoted years ago, or setting financial goals around an old income level.
Where the idea comes from
Anchoring was described by Amos Tversky and Daniel Kahneman in 1974. In one well-known experiment, participants spun a wheel that landed on a random number and were then asked to estimate a quantity. Their estimates were pulled towards the random number they had just seen, even though it had nothing to do with the question.
If an obviously random number can shift judgement, a number with personal meaning, such as the price you paid, has an even stronger pull.
Fixed reference
Judges new information against an old number instead of on its own merits.
Price is not value
A purchase price or past high says little about future returns.
Re-decide fresh
Ask whether you would buy this investment today at today's price.
How to avoid anchoring bias
- Ask the fresh-money question: "If I had this amount in cash today, would I buy this investment?" If the answer is no, the purchase price should not keep you in it.
- Use ranges, not single numbers: Plan with a range of realistic returns rather than one remembered figure. Rolling returns help here.
- Look at valuation, not price history: Use measures such as the P/E ratio or price-to-book ratio instead of distance from a past high.
- Set targets before you invest: Write down your expected holding period and review criteria at the start, so later decisions are not driven by whichever number is in front of you.
- Get an outside view: A second opinion from someone without your reference point can quickly expose an anchor.
Why anchoring matters
- It keeps money tied up in weak investments while better opportunities pass by.
- It distorts return expectations, which can lead to under-saving for goals or taking on unsuitable risk.
- It often works together with loss aversion: the purchase price becomes the anchor, and selling below it feels like a loss.
- Recognising the anchors you use is one of the simplest ways to make cleaner investment decisions.
Frequently asked questions
What is an example of anchoring bias in the stock market?
A common example is refusing to sell a stock until it returns to the price you paid, even though the business outlook has worsened. Another is assuming a stock is cheap because it trades well below its 52-week high.
Is a fund with a lower NAV cheaper?
No. NAV reflects the value of the fund's holdings per unit and the fund's history, not whether it is cheap or expensive. A ₹10 NAV fund and a ₹500 NAV fund holding the same portfolio would deliver the same percentage returns.
How is anchoring different from loss aversion?
Anchoring is relying on a reference number, such as a purchase price. Loss aversion is feeling losses more strongly than gains. They often combine when the purchase price becomes the anchor and selling below it feels like accepting a loss.