Anchoring

Letting the first number you encounter set the reference point for every judgement that follows, even when that number carries no real information about value.

Example

A share that fell from $80 to $40 feels cheap because of the $80 - but the $80 says nothing at all about what the business is worth now.

Important

The price you paid is the most dangerous anchor of all, because the market has no memory of it and your decision to hold or sell should not have one either.

Related terms

• Overconfidence bias — Systematically overestimating the accuracy of your own judgement - in particular, being far more certain of a forecast than its track record justifies.
• Sunk cost fallacy — Continuing to commit money, time or attention to a position because of what you have already put in, rather than because of what it is now worth.
• Disposition effect — The observed pattern of selling investments that have risen while holding on to those that have fallen.

Lessons that explain it

• Overconfidence and anchoring — You know less precisely than you feel you do, and the first number you saw is still quietly steering the decision you think you are making freshly. (9 min)
• Reading an old entry without rewriting it — The entry is only half the practice. The other half is going back to it later and reading what you actually wrote, rather than what you now wish you had. (11 min)

All 578 terms in the Investing glossary