Definition
Anchoring causes investors to fixate on a reference point—often the purchase price, 52-week high, or analyst target—and make decisions relative to that anchor rather than current fundamentals. A stock purchased at $100 that drops to $60 is seen as "cheap" because of the $100 anchor, regardless of whether $60 is actually a fair price based on current fundamentals.
lightbulb Example
An investor bought at $80 and the stock is now $50. They anchor to $80 and refuse to sell, waiting to "get back to even." A fresh analysis would focus on whether $50 is above or below current intrinsic value—the $80 purchase price is irrelevant.
verified_user Key Points
- Fixation on an initial reference point
- Purchase price is the most common anchor
- Irrelevant anchors affect financial estimates
- De-anchor by focusing on current fundamentals