Anchoring

Anchoring is a cognitive shortcut in which people rely heavily on an initial piece of information—the “anchor”—when making subsequent judgments or decisions. That anchor can be irrelevant or arbitrary (a sticker price, purchase price, or first offer), yet it disproportionately shapes estimates, valuations, and negotiation outcomes.

Key takeaways

• Anchoring is a bias that makes an initial number disproportionately influence later judgments.
• In investing, anchors (e.g., purchase price, past highs) can cause investors to hold losers or misjudge value.
• Anchors are powerful in negotiations: an initial high or low offer tends to pull the final outcome toward it.
• Awareness and deliberate analytic methods can reduce anchoring but rarely eliminate it completely.

How anchoring works

People tend to treat an initial reference point as informative even when it is not. In financial contexts, that anchor is often a past price, a target return, or a benchmark multiple. Decision-makers may then adjust from that anchor in light of new information, but adjustments are typically insufficient and remain biased toward the original figure.

Anchoring in investing

Anchoring can affect many elements of financial decision-making:
* Individual investors may fixate on their purchase price and resist selling after a loss, hoping the price returns to that anchor.
Analysts can become anchored to historical values (acquisition prices, peak levels) or familiar valuation multiples, ignoring evidence that fundamentals have changed.
Anchors tied to goals (required proceeds, target returns) may lead to decisions that ignore current market realities.

These anchors can lead to suboptimal outcomes: holding overvalued assets because the anchor implies they are cheap, or delaying sale of losers because the original price feels like the “true” value.

Examples

• Retail negotiation: A seller sets an initial high price; subsequent offers and the eventual sale price tend to be higher than if the seller had started low.
• Salary negotiation: The first salary figure proposed frequently pulls final compensation toward that number.
• Trading: A trader who bought a stock at $100 may focus on that level when deciding whether to sell, regardless of updated valuation based on fundamentals.
• Market forecasting: Analysts forecasting future index levels may cluster around current or recent values instead of accounting for the full historical variability.

Reducing anchoring bias

Completely avoiding anchoring is difficult, but its influence can be reduced:
* Identify the anchor explicitly and question its relevance.
Use data-driven valuation methods (discounted cash flows, comparables adjusted for differences) rather than relying on past prices or rules of thumb.
Consider alternative scenarios and actively “consider the opposite” to counteract initial impressions.
* Seek independent analyses or blind evaluations that remove the initial reference point.

Using anchoring strategically

Because anchors influence others, they can be used deliberately in negotiations:
* If you are selling or negotiating from the seller’s side, a higher opening offer can set an anchor that lifts subsequent counteroffers.
* If you are buying or hiring, a low initial offer can pull outcomes downward.
Use this tactic carefully and ethically; extreme anchors can backfire or harm relationships.

Anchoring and adjustment heuristic

Anchoring often operates together with adjustment: people start from an anchor and make incremental changes until they reach a satisfactory value. Adjustments are frequently insufficient, leaving the final judgment biased toward the original anchor. Recognizing this pattern helps in structuring decision processes that force larger, data-driven adjustments.

Conclusion

Anchoring is a powerful and pervasive bias that affects valuation, trading, and negotiation. The first number presented—accurate or not—tends to shape subsequent choices. The most effective defenses combine awareness with structured, quantitative analysis and explicit consideration of alternative values. When used deliberately and ethically, anchors can also be a practical negotiation tool.