Why Anchoring Bias is a Threat to Investors
Anchoring bias in stock price analysis can cause investors to make poor decisions by fixating on a stock’s past price instead of its true value. This psychological trap often leads to overpaying for stocks that seem like a “bargain” compared to their previous highs or avoiding stocks that have risen significantly, even if they are still undervalued.
Understanding anchoring bias is critical for buy-and-hold investors, particularly those following a value investing strategy like Warren Buffett. By focusing on intrinsic value rather than past prices, investors can avoid costly mistakes and make rational, well-informed investment choices.
In this article, we’ll explore:
✅ What anchoring bias is and how it affects investment decisions.
✅ Real-world stock market examples of anchoring bias in action.
✅ How successful investors like Warren Buffett avoid anchoring bias.
✅ Practical strategies to ensure you invest based on fundamentals, not price history.
What is Anchoring Bias?
Anchoring bias is a cognitive bias where people rely too heavily on an initial piece of information (the “anchor”) when making decisions. In investing, the anchor is often a past stock price—such as an all-time high, IPO price, or recent low.
🔹 Example Outside of Investing: Imagine you see a jacket originally priced at $200 but now on sale for $100. You might think it’s a great deal, even if the jacket is only worth $80. The original $200 price anchors your perception of value.
🔹 How This Applies to Stocks: Investors often view a stock that was once $300 and is now $150 as a bargain—even if the company’s fundamentals have worsened. Conversely, they might avoid a stock that has risen significantly, fearing they “missed the opportunity,” even if it remains undervalued.
📖 Want to master investment psychology? Read more about behavioral finance and cognitive biases in investing.
How Anchoring Bias Affects Stock Investors
1. Fixating on Past Highs or IPO Prices
Investors often believe that a stock will “return” to a previous high, leading them to buy without considering current fundamentals.
🔹 Example: Meta (META) Stock
Meta Platforms (formerly Facebook) hit an all-time high of $380 in 2021 before falling to $88 in 2022. Many investors anchored to the $380 price, assuming a return was inevitable. However, intrinsic value—not past price—determines a stock’s future performance.
📖 Learn more about stock valuation: Book Value and Stock Valuation – What Investors Should Know
2. IPO & Market Crash Anchoring
Investors also anchor to IPO prices or pre-crash levels, mistakenly believing stocks will “bounce back.”
🔹 Example: Peloton (PTON) and Zoom (ZM)
Peloton (PTON) went public in 2019 at $29 per share and surged to $160 in 2020 before collapsing below $10 in 2023. Investors anchoring to $160 might assume it’s undervalued, despite weak fundamentals.
🔹 Example: The 2008 Financial Crisis
Many banks, like Citigroup (C) and Bank of America (BAC), never returned to their pre-crisis highs. Investors who anchored to past prices failed to recognize long-term structural changes in the industry.
📖 Want to avoid common investing mistakes? Read: 10 Common Investing Mistakes New Investors Make.
The Science Behind Anchoring Bias
Anchoring bias is deeply rooted in human psychology. According to Nobel Prize-winning researcher Daniel Kahneman, people tend to rely on the first piece of information they see when making decisions—whether it’s a price tag or a stock’s past value.
📖 Read more on behavioral finance from the SEC: Investor Psychology & Biases.
Real-World Examples of Anchoring Bias in Stocks
A. The Dot-Com Bubble (1999-2002)
During the dot-com bubble, tech stocks soared to unsustainable levels before crashing. Investors who anchored to pre-crash highs held onto overvalued stocks, hoping they would recover. Many never did.
B. Warren Buffett’s Strategy to Avoid Anchoring Bias
Warren Buffett ignores past stock prices and focuses on intrinsic value instead. He has often said:
“Price is what you pay. Value is what you get.”
🔹 Example: Buffett’s Apple (AAPL) Investment
Buffett bought Apple (AAPL) in 2016 at around $26 per share (split-adjusted). At the time, many investors were anchored to its past price fluctuations and avoided it. Buffett, however, focused on Apple’s cash flow, brand strength, and long-term value—a decision that paid off immensely.
📖 Want to learn more about Buffett’s investing principles? Read: Warren Buffett’s Greatest Lessons for the Everyday Investor.
How to Avoid Anchoring Bias in Stock Price Analysis
Here are practical steps to avoid anchoring bias and focus on smart investing decisions:
✅ Ignore past stock prices – Instead of asking, “How high was this stock?” ask, “What is this stock actually worth today?”
✅ Use fundamental analysis – Focus on earnings, revenue, debt, and competitive advantage. 📖 Guide to Determining a Stock’s Intrinsic Value
✅ Compare valuation, not price – Use P/E ratios, book value, and cash flow analysis rather than anchoring to a stock’s historical price.
✅ Have an investment checklist – A checklist prevents emotional decision-making. 📖 Why You Should Create a Personal Investment Checklist
✅ Avoid reacting to market noise – 📖 Why Long-Term Investors Shouldn’t Overreact to News
Final Thoughts: Invest Based on Value, Not Price History
Anchoring bias is a dangerous psychological trap that can lead investors to overpay for declining stocks or miss out on strong opportunities. Instead of relying on past prices, focus on intrinsic value and long-term fundamentals.
By applying value investing principles and learning from great investors like Warren Buffett, you can make rational, intelligent investment decisions—free from psychological bias.
📖 Ready to refine your investment strategy? Explore our full library of investing guides.
Happy Investing!