Definition
Anchoring Bias
Anchoring bias is the tendency to lean too heavily on the first piece of information you see — the 'anchor' — when making a financial decision, even when that number is irrelevant.
When you check a stock's 52-week high and feel a price is 'cheap' because it once traded higher, you are anchored to that old number rather than the company's actual worth. Property is a classic trap: a seller quotes ₹1.2 crore, and you negotiate down to ₹1.05 crore feeling you won, even if the fair value was ₹90 lakh — the asking price became your anchor.
Anchoring shows up in mutual fund NAVs (a ₹10 NAV looks 'cheaper' than a ₹100 NAV, though that is meaningless), in waiting for a stock to 'come back' to your purchase price, and in salary negotiations. The antidote is to value an asset from independent fundamentals before you ever look at a quoted price, and to ask what you would pay if you had never seen the anchor.
Related terms
- Recency BiasRecency bias is the tendency to give too much weight to recent events and to assume the latest trend will continue, while ignoring longer history.
- Mental AccountingMental accounting is the tendency to treat money differently depending on its source or label, instead of recognising that all money is fungible.
- Behavioral FinanceBehavioral finance is the field that studies how psychology and cognitive biases affect the financial decisions of investors and markets, departing from the assumption of perfectly rational actors.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.