Anchoring Bias Explained
What is it?
Anchoring bias is the tendency to rely too heavily on the first piece of information encountered (the "anchor") when making decisions, even when it's no longer relevant. In investing, common anchors are the price you originally paid for a fund's units, or an index's previous all-time high, both of which can distort how you judge the current situation.
Why should you care?
An anchor from the past has no bearing on a fund's future prospects, but it strongly influences how investors feel about the present. An investor anchored to a fund's peak NAV may see any level below that as "cheap" and any level above it as "expensive," regardless of whether the fund's actual value justifies either label today.
Real-life example
After the Nifty 50 fell from its earlier high, many investors described the market as "cheap" purely because it was below that old anchor point — even though valuations, earnings growth, and the economic environment had all changed since then, making the old high largely irrelevant to whether current levels were actually attractive. Similarly, an investor who bought a fund's units at ₹100 (NAV) may refuse to sell even at ₹70 ("I'll wait till it gets back to ₹100") purely because of that anchor, regardless of the fund's current outlook.
Common mistakes
- Judging whether a fund's current price/NAV is "cheap" or "expensive" purely relative to its own past high or your purchase price, rather than its fundamentals.
- Refusing to sell a losing investment until it merely "breaks even" to your original purchase price — an arbitrary anchor with no relevance to future performance.
- Treating a fund's or market's all-time high as a ceiling it "must" struggle to cross again, rather than judging it fresh on current conditions.
Anchored thinking vs. fresh evaluation
| Question | Anchored thinking | Fresh evaluation |
|---|---|---|
| Is this fund cheap now? | Compared to its own past high or my buy price | Compared to its current fundamentals and category |
| Should I sell at a loss? | Wait until it reaches my purchase price | Assess based on current outlook, regardless of purchase price |
FAQ
Why is anchoring on my own purchase price a mistake?
The market has no memory of what you paid — a fund's future returns depend entirely on its future prospects, not on the specific price at which you happened to buy it. Anchoring to your buy price is a purely psychological reference point with zero predictive value.
Can anchoring cause investors to miss good opportunities too?
Yes — an investor anchored to a stock or fund's much lower price from years ago may refuse to buy it now, believing it's "too expensive," even if its fundamentals have genuinely improved enough to justify the higher price.
Is there a way to remove anchoring bias from a decision?
A useful mental exercise: ask "if I didn't already own this fund and had cash to invest today, would I buy it right now at this price?" This reframes the decision away from the anchor and toward the fund's current merit.
Does anchoring only apply to prices?
No — investors also anchor to past return numbers ("this fund used to give 20% returns") or past risk levels, even when a fund's category, size, or strategy has since changed in ways that make the old numbers less relevant.
See this concept applied to your own portfolio
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