What Is Anchoring in Investing?

Anchoring bias happens when individuals become too focused on the first piece of information that they receive (the “anchor”) when making decisions, even if the information is irrelevant or outdated. In investing, this bias can lead to poor decision-making, such as sticking to an initial stock price target or holding onto an asset based on its historical price rather than its current value. Anchoring bias can lead to missed opportunities and suboptimal returns, negatively impacting your portfolios.

Do you want guidance avoiding anchoring bias or other common investment mistakes in your portfolio? Consider reaching out to a financial advisor .

What Is Anchoring Bias?

Anchoring bias is a cognitive bias that occurs when individuals make decisions based only on the initial information they encounter. In investing, anchoring bias can manifest in different ways – maybe you or an investor you know are prone to fixating on a stock’s initial purchase price or a specific target price, regardless of new information or changing market conditions.

For example, an investor who purchases a stock at $50 a share may anchor their perception of the stock’s value to that initial price, even if market conditions change. If the stock drops down to $30, the investor might hold their position, hoping the stock will return to $50 a share despite evidence that its value decreased due to poor company performance. This fixation on the original price can cause investors to keep losing investments for too long, resulting in further losses.

Anchoring bias can also impact how you perceive market trends and news. For example, if an investor reads a positive analyst report about a company’s future prospects, they may anchor their perception of the stock’s potential to that report, ignoring subsequent negative news or changes in market conditions. This can lead to overconfidence in the investment and a refusal to adjust their strategy based on new information.

How Can You Avoid Anchoring Bias?

To avoid anchoring bias, you need to make a conscious effort to recognize the signs, and remain objective when making investment decisions. Here are four general strategies that can help:

• Stay informed: Expand your knowledge of market trends, economic indicators and company-specific news. This will help you make decisions based on current information rather than outdated reference points.
• Set objective criteria: Establish clear criteria for buying or selling investments based on fundamental investment analysis and technical indicators rather than emotional or initial impressions. This can help keep you from allowing anchoring bias to influence your decisions.
• Review and adjust: Regularly review your investment portfolio and strategies, and be willing to adjust your approach based on new information or changing market conditions. This flexibility can help you avoid sticking to outdated beliefs.
• Seek diverse perspectives: Consult with financial advisors or other knowledgeable individuals to gain different perspectives on your investments. This can help challenge your initial assumptions and provide a more balanced view.

Can You Use Anchoring Bias to Your Benefit and, if so, How?

While anchoring bias is generally considered detrimental to decision-making, there are ways it can be used strategically in investing. Here are three possible benefits:

• Setting price targets: Anchoring can help investors set initial price targets or valuation benchmarks. However, it’s important to regularly reassess these targets based on new data and market trends to ensure they remain relevant.
• Negotiation leverage: In negotiations, anchoring can be used to set a starting point that influences the outcome. For example, during a stock purchase negotiation, anchoring to a lower initial offer can potentially lead to a better deal.
• Risk management: Anchoring can help establish initial risk tolerance levels. Investors can set stop-loss orders or predetermined sell points based on their anchored expectations, providing a disciplined approach to risk management .

While anchoring bias can be leveraged strategically in some situations, you should remain aware of its potential drawbacks and maintain a balanced approach to decision-making.

Bottom Line

Anchoring bias in investing can cause you to rely too heavily on initial information, significantly and negatively impacting your investment decisions. This bias can lead to poor investment choices, such as holding onto underperforming stocks or missing out on better opportunities. This is why it’s important to understand the nature of anchoring bias and implement strategies to recognize and avoid it.

Portfolio Management Tips

• A financial advisor can help you recognize signs of anchoring bias and avoid allowing it to impact your portfolio. Finding a financial advisor doesn't have to be hard. SmartAsset's free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you're ready to find an advisor who can help you achieve your financial goals, get started now .
• Finding an appropriate mix of stocks, bonds and cash is an important part of managing your investment portfolio. SmartAsset's asset allocation calculator can help you select the right combination of assets based on your risk tolerance and objectives.

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