Anchoring bias

Anchoring is the mind's habit of latching onto the first number it sees and judging everything afterward relative to that anchor — even when the anchor is irrelevant.

The market example

A stock that traded at 200 last year is now at 80. To a trader anchored on 200, the stock looks "cheap" — a bargain at 60% off. But the 200 is meaningless if the business has deteriorated; the stock may be perfectly priced at 80, or still expensive. The anchor creates a false sense of value.

Anchoring also shows up around your entry price. Having bought at 50, you mentally treat 50 as fair value and wait for the price to "come back" to it, even when every current signal says otherwise. The market does not know or care what you paid.

Another common form

Round numbers and previous highs act as anchors for everyone at once — which is partly why prices hesitate at levels like 100 or at an old all-time high. The anchor becomes self-fulfilling.

How to counter it

• Judge a position on current information only. The relevant question is never "what was it?" but "what is it worth now, and where is it likely to go?"
• Ignore your entry price when deciding whether to stay in a trade. It is a sunk fact (see the sunk-cost lesson) and has no bearing on the future.
• Build your thesis from independent evidence — valuation, trend, catalysts — rather than from a reference price you happened to notice first.