Anchoring Bias: Why First Numbers Stick in Our Heads - Behavioral Finance Series

The First Number That Quietly Takes Control

You’re researching a stock that currently trades at $82. An analyst report flashes a bold headline:

“Target Price: $120.”

Instantly, $120 lodges itself in your mind. Even as you read about slowing growth, rising competition, or margin pressure, your thinking keeps circling one question:

Will it reach $120 or not?

What rarely gets asked is the more important question:

Is $120 even a sensible reference point to begin with?

This is anchoring at work. The first number doesn’t just influence your judgment—it quietly frames how you interpret everything that follows. In finance, where numbers dominate decisions, anchoring is one of the most powerful and underestimated cognitive biases investors face.

Core Theory: What Is Anchoring—and Why It’s More Powerful Than It Looks

Anchoring is the tendency to rely too heavily on an initial piece of information (the anchor) when making judgments. Once an anchor is set, subsequent decisions tend to stay close to it—even when the anchor is irrelevant, outdated, or arbitrary.

The Two-Stage Model of Anchoring

Modern academic literature increasingly describes anchoring as a two-stage process, not a single error.

Stage 1: Anchors Set the Starting Point (Insufficient Adjustment)

This is the classic mechanism most people recognize.

We begin with an initial number and then try to adjust away from it—but our adjustments are typically too small.

Example:

If someone suggests a company is worth $10 billion, you may revise that estimate after reviewing financials. But you are unlikely to land at $4 billion, even if fundamentals justify it. The original anchor pulls your estimate toward itself.

Stage 2: Anchors Shape Information Search (Priming Effect)

More subtly—and more dangerously—the anchor influences what your mind looks for.

If you hear that a stock “should be worth $200,” your brain automatically starts searching for confirming evidence:

1. “Margins could expand.”
2. “Growth may reaccelerate.”
3. “Peers trade at higher multiples.”

Contradictory evidence does not disappear—but it receives less weight. In this way, anchoring does not merely affect your final estimate; it shapes the entire reasoning process. Reality testing becomes biased from the start.

Why Anchoring Is a System 1 Bias

Anchoring operates primarily through System 1 thinking—fast, automatic, and intuitive. The brain prefers a reference point because starting from zero is cognitively demanding.

System 2 (slow, analytical thinking) often arrives later and merely adjusts around the anchor instead of replacing it. This explains why anchoring persists even among intelligent, numerate, and experienced investors.

Financial Consequences: How Anchoring Distorts Real Decisions

Anchoring affects financial behavior at every level—from individual portfolios to global markets.

1. Anchoring to Purchase Price (Cost Basis)

One of the most damaging forms of anchoring for individual investors is anchoring to the price they paid.

Example:

You buy a stock at $50. It falls to $32.

Instead of asking, “Is this stock still worth owning today?” you ask,

“Should I wait until it gets back to $50?”

The purchase price becomes the emotional reference point for gain or loss—even though it is economically irrelevant. This behavior drives the disposition effect:

1. Holding losing stocks too long
2. Selling winning stocks too early

The only rational reference point is future expected value, not past cost. Anchoring to cost basis turns investing into emotional bookkeeping rather than forward-looking decision-making.

2. Portfolio Allocation and Historical Anchors

Investors often anchor to historical returns or past market levels.

Examples:

1. “Stocks always return about 10–12% long term.”
2. “This fund used to outperform, so it will again.”

Such anchors can cause investors to under-react when economic regimes change—such as prolonged low-interest-rate periods or structural shifts in industries.

3. Earnings Forecasts and Market Expectations

Analysts frequently anchor to prior earnings or consensus estimates.

If last quarter’s earnings were $2.50 per share, forecasts for the next quarter often cluster around $2.60–$2.70, even when fundamentals justify a much wider range.

Markets then overreact to “earnings surprises” that were only surprising because expectations were anchored too narrowly.

4. Anchoring in Macro and Interest Rate Expectations

Anchoring also affects how investors think about the overall economy.

When central banks say things like “interest rates will stay higher for longer,” that message often becomes a mental reference point for markets and investors. In the same way, familiar rules of thumb—such as the 4% retirement withdrawal rule or well-known valuation measures like the Shiller CAPE—can strongly influence how investors judge risk and future returns, even when economic conditions start to change.

Anchors help coordinate expectations—but they can also delay adjustment when economic conditions change.

Expert vs Novice Behavior: The Real Difference

Novices

1. Rely heavily on the first number encountered
2. Treat analyst targets, purchase prices, and headlines as natural reference points
3. Rarely question whether the anchor itself is valid

Experts

Importantly, expertise does not eliminate anchoring. It changes its form.

Professionals often anchor to:

1. Their own valuation models
2. Discounted cash flow (DCF) outputs
3. Consensus forecasts

These anchors are more sophisticated—but can be equally sticky.

The true differentiator is process, not intelligence.

How Experts Reduce Anchoring

1. Multiple Independent Valuations : Rather than relying on a single model, professionals use several methods—DCF, comparables, scenario analysis—to prevent fixation on one output.
2. Reference Class Forecasting : Instead of anchoring to the specifics of a single case (“This project will cost $X”), experts look at outcomes across a broad class of similar projects. This approach deliberately bypasses idiosyncratic anchors and starts from statistical reality.
3. Peer Review and Accountability : Investment committees force assumptions to be defended and challenged.
4. Bayesian Updating : Experts treat initial estimates as provisional beliefs and update them meaningfully as new evidence arrives—not marginally.

Practical Strategies to Reduce Anchoring Bias

Anchoring cannot be eliminated—but it can be managed.

1. Delay Commitment

Time weakens automatic System 1 reactions. Avoid acting immediately on first numbers, especially in volatile markets.

2. Ask “Why This Number?”

Whenever you see a price target or forecast, ask:

1. Where did this number come from?
2. What assumptions produced it?
3. What would invalidate it?

3. Use Ranges, Not Point Estimates

Replace single numbers with ranges and scenarios. This encourages probabilistic thinking and reduces fixation.

4. Reverse the Anchor

Ask: “If I had never seen this number, what would my conclusion be?”

This mental reset often reveals how influential the anchor really is.

5. Keep a Decision Journal

Recording assumptions and anchors helps identify recurring patterns and improves long-term judgment calibration.

Nuance & Debate: When Anchoring Helps—and When It Harms

Anchors Can Be Adaptive

In uncertain environments, anchors provide efficiency. They help prevent wildly unrealistic estimates and offer coordination points for decision-making.

Arbitrary Coherence (Dan Ariely)

Dan Ariely’s research shows that people can anchor to numbers that have no real meaning. Once an anchor is set, the mind builds a consistent story around it, making judgments feel reasonable. Anchoring creates confidence and coherence—but not necessarily accuracy.

Anchoring as a Strategic Tool

Anchoring is not just a bias—it is also a deliberate tactic.

In negotiations and sales, setting the first anchor is often a strategic move. Understanding anchoring is therefore about both improving your own decisions and defending yourself against others who use it intentionally.

Clear Takeaway: Awareness Is Financial Leverage

Anchoring reflects the natural way our minds think, not a flaw in intelligence. First numbers shape attention, frame interpretation, and influence judgment long after their relevance fades.

The goal is not to avoid anchors entirely but to recognize them, question them, and contextualize them. Structured processes, multiple perspectives, and disciplined updating allow investors to anchor decisions in evidence—not in the first number they encounter.

Reflective Prompt

The next time a number grabs your attention, pause and ask:

1. Is this a meaningful reference—or just the first one I saw?
2. What alternative anchors could I use?
3. What decision would I make if this number disappeared?

In investing, clarity often begins by loosening invisible anchors.