Portfolio Management
Anchoring Bias: Why First Numbers Are Hard to Ignore
Anchoring bias describes a simple but powerful tendency. Once a number or reference point enters the mind, it quietly influences subsequent decisions, even when that number has little relevance. In finance, where valuation and judgement depend heavily on estimates, anchoring can significantly distort outcomes.
This bias appears frequently in behavioural finance questions because it explains why investors struggle to adjust their views when new information arrives.
What Anchoring Bias Really Is
Anchoring bias occurs when individuals rely too heavily on an initial piece of information while making decisions.
That initial value becomes a mental reference point. Even when better or more recent information is available, adjustments away from the anchor tend to be insufficient.
The problem is not lack of data. It is the persistence of the first impression.
How Anchoring Shows Up in Investing
Anchoring is common in valuation and price expectations.
An investor may fixate on a stock’s past high price and judge current value relative to that level. Another may anchor on a purchase price and hesitate to sell, even when fundamentals deteriorate.
In both cases, the anchor influences judgement more than current information.
Anchoring in Forecasts and Estimates
Anchoring also affects forecasts.
Analysts often begin with last year’s earnings or prior growth rates. Even when conditions change, forecasts may remain close to the original estimate. Adjustments happen, but they are usually too small.
This behaviour explains why consensus forecasts can lag reality.
Why Anchoring Persists
Anchoring persists because it reduces mental effort.
Starting from a known reference feels easier than evaluating a situation from scratch. The brain treats the anchor as a shortcut, even when accuracy suffers.
Experience does not fully eliminate this tendency. Professionals are just as vulnerable as retail investors.
Market Implications
At the market level, anchoring contributes to slow price adjustment.
Prices may respond gradually to new information because investors remain anchored to old valuations. This helps explain momentum effects and delayed reactions observed in financial markets.
Behavioral finance uses anchoring to explain why prices do not always reflect new data immediately.
Anchoring and Exam Scenarios
In CFA and FRM exams, anchoring is often tested indirectly.
Candidates may be asked to identify why an investor fails to revise expectations or continues to rely on outdated benchmarks. Recognising the role of anchoring is more important than memorising definitions.
Common Misunderstandings
Anchoring is not stubbornness.
It is not intentional bias.
It does not disappear with experience.
It is a cognitive shortcut that quietly shapes judgement.
Final Thought
Anchoring bias shows how strongly first impressions influence financial decisions. In investing, clinging to outdated reference points can lead to mispricing, poor timing, and flawed forecasts. For exam preparation, the key is understanding how anchoring limits adjustment and why investors struggle to move away from initial beliefs. Once this is clear, anchoring bias becomes easy to identify in both theory and practice.
