Anchoring
Why the price you paid haunts every later decision, even when it is utterly irrelevant.
Anchoring is the brain’s tendency to fixate on a reference number — an “anchor” — and judge everything relative to it, even when that number is irrelevant to the decision at hand. In investing, the most common anchor is the price you paid.
The trap: the market does not know or care what price you paid — yet your brain treats your purchase price as if it were the “true” value, anchoring every later decision to it. You bought at ₹500, the stock falls to ₹400, and you refuse to sell because “it’s worth ₹500, I’ll wait for it to get back there.” But ₹500 is meaningless — it’s just what you happened to pay; the stock’s actual worth depends on the business now, not your entry. Anchoring makes you hold losers waiting to “break even” (the breakeven-itis that pairs with loss aversionA loss hurts about twice as much as an equal gain feels good.), refuse to buy a great stock because it’s “higher than when I first looked,” and judge a stock as “cheap” or “expensive” relative to its past price rather than its real value. Other anchors hijack you too: a 52-week high (“it was ₹1,000, so ₹600 is cheap” — maybe it was overvalued at ₹1,000), or an analyst’s target price. The defence: make decisions on forward-looking value and your current thesis, not on any historical anchor — especially not your own purchase price. Ask “if I had cash today, would I buy this at this price?” — a question that strips the anchor away.
- What it is — fixating on a reference number (often your purchase price) and judging everything relative to it.
- The trap — the market doesn’t care what you paid; your entry price is irrelevant to what the asset is worth now.
- It causes — holding losers to “break even,” avoiding good stocks that rose, mis-judging cheap/expensive vs past prices.
- The defence — decide on forward value and current thesis; ask “would I buy this today at this price?”
ExampleYou bought a stock at ₹500; it’s now ₹400 with deteriorating fundamentalsValuing a company from its business and financials.. Anchored to ₹500, you hold “until it recovers.” But the right question isn’t “willArranging how your wealth passes on after death. it get back to my price?” — it’s “would I buy this business at ₹400 today, given what I now know?” If no, the ₹500 anchor is the only thing keeping you in a stock you’d never buy fresh. The anchor, not analysis, is driving you.
Key takeawayAnchoring fixates you on a reference number — usually your purchase price — and warps later decisions, even though the market doesn’t care what you paid. It causes holding losers to “break even” and mis-judging value vs past prices. Decide on forward-looking value and your current thesis; ask “would I buy this today at this price?”
FAQs
How do I avoid anchoring to my purchase price?
Use the “fresh money” test: ask whether you’d buy the investment *today* at its current price, knowing what you now know — if not, your only reason to hold is the irrelevant anchor of your entry price. Focus on the asset’s *forward* prospects and current thesis, not on getting back to break-even. The price you paid is sunk and meaningless to today’s decision.