Anchoring Bias
The tendency to rely too heavily on the first piece of information encountered when making financial decisions.
What is Anchoring Bias?
Anchoring bias occurs when investors fix their judgment to an initial reference point — such as a stock's 52-week high, an analyst price target, or the price at which they bought shares — and fail to sufficiently adjust as new information arrives. The anchor distorts perception of fair value. An investor anchored to a $100 purchase price may refuse to sell at $80 even when fundamentals justify it, or may view a stock at $60 as 'cheap' compared to $100 without evaluating intrinsic value. Anchoring is particularly powerful in negotiation, initial public offerings, and buy/sell decisions.
Example
A stock investor bought shares at $150. The price falls to $90 on deteriorating fundamentals, but the investor anchors to the $150 purchase price and refuses to sell, believing the stock must 'return' to its former level. Research by Tversky and Kahneman (1974) demonstrated that even arbitrary numbers influence numerical estimates, a finding that directly applies to stock price anchoring.
Source: Tversky & Kahneman — Judgment Under Uncertainty (1974)