The Psychology of Bad Investing: 7 Cognitive Biases That Cost You Money

3. Anchoring Bias: The Weight of First Impressions

Anchoring bias occurs when individuals rely too heavily on the first piece of information they encounter (the "anchor") when making decisions. In investing, this can lead to fixation on historical prices or initial valuations, even when subsequent information suggests a different course of action. For example, an investor might hold onto a declining stock because they are anchored to its higher purchase price, waiting for it to rebound to that level. To overcome anchoring bias, investors should focus on current market conditions and future potential rather than past benchmarks. Regularly reassessing investments based on new data can help prevent costly inertia.