Lesson 1.1 · 1 of 5 · How your mind tricks you
Anchoring bias in investing: why your purchase price misleads you
Anchoring means you start from a number you have seen and adjust too little away from it, even when that number has nothing to do with the question. In investing, the usual anchors are your purchase price, the 52-week high and analysts’ price targets. The rule: every decision starts from what the business is worth today.
Terms in this lesson
- 52-week high
- The highest price of the past year and how far today's price is from it.
- Price target
- The price analysts think a stock will reach in 12 months.
- Fair value
- What a stock should be worth, based on the business behind it.
Opening question
You bought a share at $200. It now trades at $140. Which question helps you most in deciding what to do with it?
Only the second question starts from where things stand today. The other three start from a number in the past: your price, the high or an old target. The market has no idea what you paid.
It does not matter if you get it wrong: trying first helps you remember.
What anchoring is: the wheel-of-fortune experiment
Before the explanation, a quick test. Answer fast and without a calculator, as if you only had a few seconds.
Estimate
You have 5 seconds and no calculator: what is 8 × 7 × 6 × 5 × 4 × 3 × 2 × 1? Give a range you think contains the answer.
How sure are you?
The answer is 40,320. In the 1974 study, high school students also had 5 seconds. Those shown the multiplication starting with 8 gave a median estimate of 2,250. Those shown it starting with 1 (1 × 2 × ... × 8) gave 512. The first few steps became the anchor, and both groups adjusted far too little. If your range stayed well below 40,320, you have just felt the effect.
Definition
What is anchoring?
You start from a number and adjust too little away from it.
In 1974 the psychologists Amos Tversky and Daniel Kahneman spun a wheel numbered 0 to 100 in front of participants. They then asked whether the percentage of African countries in the United Nations was higher or lower than the number that came up, and asked for an estimate. The group whose wheel stopped at 10 gave a median estimate of 25%. The group whose wheel stopped at 65 gave 45%. Everyone could see the number was random, yet it moved the estimate by 20 points. Paying people for accurate answers did not reduce the effect.
Medians from Tversky and Kahneman, Science, 1974.
Check yourself
What did the wheel-of-fortune experiment show?
The wheel had nothing to do with the UN, yet the estimates followed it. The paper says plainly that rewards for accuracy did not reduce the effect.
Anchoring on your purchase price
Your purchase price is the most visible number in your account: it sits next to every holding, with the gain in green or the loss in red. For today’s decision, though, it tells you nothing about the business. It only tells you what you paid, and the other buyers and sellers neither know nor care.
- Waiting to get back to your price, then sellingYour purchase price becomes the finish line, even though the company may no longer be worth what it trades at today.
- Buying more just to bring your average cost downA lower average looks nicer in the account, but it is only a good decision if you would buy the company anyway at today’s price.
- Selling a winner because it has “gone up enough” since you boughtYour gain since purchase says nothing about whether the share is cheap or expensive now.
Work it out
You bought at $200 and the share now trades at $140. By what percentage does the price need to rise to get back to $200?
This exercise is in the free account, where we also save your progress.
Create a free accountMyth or fact?
“It’s not a loss until I sell.”
This exercise is in the free account, where we also save your progress.
Create a free accountThe 52-week high and analyst price targets
Example
What did George and Hwang find about the 52-week high?
Shares close to their 52-week high went on to earn higher returns on average, not lower.
Thomas George and Chuan-Yang Hwang studied US shares from 1963 to 2001 (Journal of Finance, 2004). How close a price was to its 52-week high predicted later returns better than past returns did, and the effect did not reverse in the long run. Their proposed explanation: traders use the high as a reference point and, as the price nears it, are reluctant to bid it higher, even when the news justifies it. That is an anchoring explanation, not a certainty, and a historical result is not a buying rule.
Check yourself
A share is 40% below its 52-week high. What can you tell from that alone?
This exercise is in the free account, where we also save your progress.
Create a free accountAn analyst’s price target sticks in the mind too. A target of $300 seems to say “this share is worth $300”. In fact it is one analyst’s estimate, made on a given date, resting on assumptions. The useful question is not “how far is the target?” but “what assumptions sit behind it, and do I believe them?”.
- Cover up your purchase priceWhen you decide, look at today’s results and valuation as if you didn’t own the share.
- Ask today’s question“Would I buy it now, at this price, knowing what I know?” If the answer is no, write down why you still hold it.
- Make your estimate before you see targetsWrite a range for fair value, then compare it with analysts’ targets, not the other way round.
- Use several reference pointsCompare with similar companies and with the company’s own history, not with a single number.
What would you do?
You bought shares at $50. The company has reported weak results and the share is now $38. What do you do?
This exercise is in the free account, where we also save your progress.
Create a free accountWhat you learned
- Anchoring: you start from a number you have seen and adjust too little, even when the number is random.
- In investing, the usual anchors are your purchase price, the 52-week high and analysts’ price targets.
- The rule: decisions start from today’s value; ask “would I buy it now, at this price?”.
One more time
The questions you got wrong, asked a different way.
Check yourself
Why is the wheel-of-fortune experiment so striking?
Everyone watched the wheel spin, so they knew the number was chance. The 20-point gap between the groups comes from the anchor alone.
You reached the end
Keep what you learned
With a free account we remember your lessons, bring back the questions you got wrong exactly when you need them and keep your streak.
Save your progress with a free accountLessons are educational. They are not a recommendation to buy or sell. Investing involves risk and you can lose money. Sources: A. Tversky, D. Kahneman, “Judgment under Uncertainty: Heuristics and Biases”, Science 185, 1974, pp. 1124-1131; R. A. Klein et al., “Investigating variation in replicability: A Many Labs replication project”, Social Psychology 45(3), 2014; T. J. George, C.-Y. Hwang, “The 52-Week High and Momentum Investing”, Journal of Finance 59(5), 2004, pp. 2145-2176; accessed 29 October 2026. The $200, $140, $50 and $38 examples are illustrative.