Anchoring Bias in Investing – How the First Number Shapes Your Decisions

Imagine you're considering buying shares of a company listed on the Warsaw Stock Exchange (GPW). They once traded at 120 PLN, and now they're at 65 PLN. Your brain immediately whispers: "bargain – they've dropped by half!" But are they really? Where does the conviction come from that 120 PLN was the "right" price? You've just fallen victim to one of the most powerful cognitive biases – the anchoring effect.

What Is Anchoring Bias?

Anchoring bias is the human mind's tendency to rely too heavily on the first piece of information encountered when making decisions. This initial value – the "anchor" – becomes a reference point around which all subsequent estimates revolve.

The term was first described by Amos Tversky and Daniel Kahneman in 1974. In a famous experiment, researchers asked participants to estimate what percentage of African countries belong to the United Nations. Before answering, participants spun a wheel of fortune that randomly landed on either 10 or 65. Those who got 10 estimated an average of 25%. Those who got 65 estimated an average of 45%. A completely random number from a wheel of fortune anchored their estimates.

How Anchoring Works in Financial Markets

In financial markets, anchors are everywhere. Here are the most common mechanisms through which anchoring leads investors astray.

Historical Stock Price as an Anchor

This is the most prevalent variant. An investor remembers that shares of a major Polish gaming company once traded above 400 PLN. When they see a price of 150 PLN, they automatically think "cheap." But the historical peak says nothing about the company's fundamental value today. Market conditions, competition, product pipeline – everything has changed. A price of 150 PLN could just as easily be too high as too low. The historical peak is just a number, not an oracle.

Purchase Price as an Emotional Anchor

You bought an S&P 500 ETF at 450 PLN per unit. Now it's at 380 PLN. Your brain says: "don't sell, you'll lock in a loss." This is classic anchoring combined with loss aversion. Your purchase price has zero relevance to future investment returns. The market doesn't know what you paid, and it doesn't care.

Analyst Forecasts as Anchors

An analyst at a brokerage sets a target price for a company at 200 PLN. From that moment, your brain treats this number as a navigation point. If shares cost 140 PLN, they seem "cheap." If 220 PLN – "expensive." Meanwhile, the analyst's forecast is just one person's opinion, based on specific assumptions that can – and often do – prove wrong.

Round Numbers as Psychological Anchors

The WIG20 crossing 2,000 points. The dollar at 4 PLN. Bitcoin at 100,000 USD. Round numbers have a disproportionately large impact on our market perception. They carry no fundamental significance, but they act as powerful psychological anchors around which buy and sell orders cluster.

Why Is Anchoring So Dangerous?

Anchoring bias is particularly insidious for several reasons.

It operates unconsciously. Even if you know about its existence, defending against it is difficult. Research shows that financial experts are susceptible to anchoring almost to the same degree as amateurs. Awareness of the bias doesn't automatically eliminate it.

It's omnipresent. Anchors lurk in press headlines, in conversations with friends, in brokerage app interfaces. Every number you see before making a decision can become an anchor.

It amplifies other cognitive biases. Anchoring rarely operates in isolation. It combines with confirmation bias (you seek information confirming the anchor is "correct"), loss aversion (you hold losing positions because the anchor is your purchase price), and the disposition effect (you sell winning positions too early because the anchor is a small gain).

Anchoring in Practice – Examples from Poland

The Warsaw Stock Exchange and "the Market Should Be Higher"

Many Polish investors remember the bull run of 2003–2007, when the WIG index rose from around 14,000 to over 67,000 points. That peak became an anchor for an entire generation of investors. For years after the 2008 crisis, people waited for a "return to normal" – meaning back to the 67,000 level. Meanwhile, the market had changed, the index composition had changed, the entire economy had changed. The 2007 anchor was completely inadequate.

Real Estate – "An Apartment in Warsaw Should Cost X"

In the real estate market, anchoring is even stronger. Someone remembers that in 2019, a square meter in a good Warsaw location cost 10,000 PLN. When they see a price of 18,000 PLN in 2025, they automatically judge it as "too expensive." But conditions have changed – inflation, construction costs, demand, interest rates. The old price is no indicator of value.

Cryptocurrencies – Anchoring on Steroids

The crypto market is a paradise for anchoring bias. Bitcoin at 69,000 USD (the 2021 peak), Ethereum at 4,800 USD – these numbers stay in people's heads for years. Investors buy "because it's cheap compared to the peak," completely ignoring fundamental changes in the ecosystem.

How to Defend Against Anchoring Bias

Complete elimination of anchoring is probably impossible – it's too deeply embedded in how our brains process information. But you can significantly reduce its impact.

1. Analyze from Scratch

Instead of looking at the historical price and wondering whether the current one is "high" or "low," ask yourself: "If I had no prior information about this company, how much would I be willing to pay based on its current fundamentals?" It's a difficult exercise, but incredibly valuable.

2. Use Multiple Valuation Models

Don't rely on a single number. Use DCF, compare P/E ratios with the industry, check EV/EBITDA, analyze cash flow. The more independent reference points you have, the harder it is for a single anchor to dominate your thinking.

3. Seek Information That Challenges Your Thesis

Actively look for arguments against your investment decision. If you believe a company is cheap, search for reasons why it could become even cheaper. This "devil's advocate" technique is one of the most effective methods for combating anchoring.

4. Set Rules Before Making Decisions

Define buy and sell criteria before you see the price. For example: "I buy when P/E < 15 and dividend yield > 3%." Rules established in advance are less susceptible to anchoring than ad hoc decisions.

5. Keep an Investment Journal

Record the reasons for each decision. Return to them after a month, a quarter, a year. You'll see how often your decisions were anchored to irrelevant numbers. Tools like Freenance help track financial progress and visualize changes over time, making it easier to spot patterns in your own behavior.

6. Give Yourself Time

Don't make investment decisions immediately after seeing new information. Give yourself 24–48 hours. The anchoring effect weakens over time, though it never fully disappears.

Anchoring and DCA – Why Systematic Investing Helps

The Dollar Cost Averaging strategy (investing fixed amounts regularly) is one of the best antidotes to anchoring. Why? Because it eliminates the decision of "is it cheap or expensive now?" You invest every month regardless of the price. You don't need an anchor because you're not making a timing decision.

If you invest 1,000 PLN monthly in a WIG20 ETF, you don't care whether the index is at 1,800 or 2,200 points. You buy systematically, and your average purchase price smooths out over time. This doesn't eliminate market risk, but it does eliminate anchoring risk.

Anchoring in Financial Negotiations

Anchoring bias has enormous significance not just in stock markets, but in every financial negotiation.

Salary negotiations. If a recruiter asks "what do you currently earn?" – your current salary becomes the anchor for the offer. That's why more experts advise not revealing your current compensation and instead stating your expected amount (a higher anchor).

Car purchases. The dealer's sticker price is an anchor. Even if you negotiate a 15% discount, your brain feels satisfied – because the reference point was the catalog price. The dealer knows this and deliberately sets the anchor high.

Budget planning. If you've been spending 5,000 PLN per month for years, that amount becomes an anchor. When your income grows, it's hard to significantly change your spending structure because the anchor keeps you around the old amount (which in this case might actually be beneficial – it protects against lifestyle inflation).

Summary – Anchors Are Inevitable, but You Can Control Them

Anchoring bias is one of the strongest and best-documented cognitive biases. It influences every financial decision – from stock selection, through salary negotiations, to household budget planning.

You won't eliminate it entirely. But you can:

• Be aware of its existence
• Actively seek alternative reference points
• Use systems (like DCA) that minimize its impact
• Track your decisions and analyze them in retrospect – regular financial monitoring, for instance with Freenance, helps you notice when emotions and anchors start governing your portfolio

Remember: every number you see before making a decision can become your anchor. The only defense is awareness and a systematic decision-making process.

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This article is educational in nature and does not constitute investment advice. Make financial decisions based on your own analysis or consultation with a licensed advisor.