Anchoring bias

What is anchoring bias

Anchoring bias is a cognitive bias in which people rely too heavily on the first piece of information they receive and use this "anchor" as the basis for further decisions. Even when this initial information is irrelevant or inaccurate, it strongly influences estimates, judgements and choices.

In investing, anchoring bias can lead to a mistaken assessment of an asset's value and to holding unfavourable positions just because the investor is anchored to historical or initial figures.

How anchoring bias shows up in investing

• The investor fixates on the original purchase price of a stock and refuses to sell until the price returns to that level, even though fundamentals have deteriorated.
• An analyst adjusts earnings forecasts to the first number they saw and pays insufficient attention to new data.
• Market participants react to previously announced price targets and ignore changes in the economic environment.

Why anchoring bias happens

Anchoring bias is tied to how the brain processes information. The first data point serves as a reference point from which subsequent estimates are derived. This process is subconscious and affects the decisions even of experienced investors.

How to avoid anchoring bias

• Regularly reassess investment theses against up-to-date data.
• Do not compare the current price only with historical values, but also with the intrinsic value.
• Use objective valuation methods, for example the DCF model or P/E ratio.

Anchoring bias on the Stonkee platform

On Stonkee, the AI flags possible signs of anchoring bias in a user's portfolio. For example, if an investor is holding a losing position just because of its original purchase price, the system offers a fundamental analysis and alternative scenarios.

Summary

Anchoring bias is a psychological distortion that can lead to poor investment decisions. Recognising this bias and actively eliminating it helps investors stay objective and flexible in managing their portfolio.