Definition
Anchoring to Purchase Price
Anchoring to purchase price is the specific bias of fixating on what you paid for an investment, letting that number drive decisions to hold or sell.
Investors often refuse to sell a falling stock until it 'returns to my cost', or rush to sell the moment it crosses their entry price, as if the purchase price were meaningful to the market — it is not. The asset's future prospects, not your historical cost, should determine whether to hold it.
This is a practical form of anchoring bias intertwined with loss aversion and the disposition effect. The corrective is to ask, for each holding, 'would I buy this today at the current price with fresh money?' — a question that ignores your irrelevant entry cost.
Related terms
- Anchoring BiasAnchoring 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.
- Loss AversionLoss aversion is the well-documented tendency for the pain of a loss to feel roughly twice as powerful as the pleasure of an equivalent gain.
- Disposition EffectThe disposition effect is the tendency to sell winning investments too early to bank a gain, while holding on to losing investments too long to avoid realising a loss.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.