Anchoring bias

Anchoring bias is the tendency to lean too heavily on an initial piece of information when forming a judgment, even when that information has little to do with the actual value of what is being assessed. In investing, this most often shows up as fixating on the price paid for a stock, or its all-time high, as a reference point for whether the current price is cheap or expensive.

An investor who bought a stock at $100 and watches it fall to $60 may anchor on that original $100 price, judging $60 as cheap simply because it is lower than what they paid, rather than independently assessing what the company is actually worth today. The same bias works in reverse with a stock that has risen sharply, where a previous, lower price can make the current price feel expensive even if the business has genuinely grown into a higher valuation.

The problem with anchoring is that a past price carries no information about a company's current earnings, growth prospects, or competitive position. Guarding against it means treating an old price, whether a purchase price, a 52-week high, or an analyst's earlier price target, as irrelevant to what a stock is worth today, and instead reassessing the business based on its current fundamentals rather than its price history.