Anchoring bias
A cognitive error in which people rely too heavily on an initial piece of information — a purchase price, a past high, a first quote — and judge everything afterwards against it.
In plain language
In a negotiation, the first price mentioned tends to become the reference for everything that follows. That is anchoring.
The workbook defines it as relying on pre-existing information when making decisions. Investors anchor their decisions around some initial information they relied on heavily, and then see all subsequent information in light of that anchor.
In investing, the anchor is usually a number: the price you paid, the 52-week high, a target price from an old report, last year's return. The workbook gives the direct example: judging where a stock's price could be on the basis of its past performance is anchoring.
How it works
The workbook splits investor biases into two families:
| Emotional biases | Cognitive errors | |
|---|---|---|
| Source | Feelings, deep-rooted personal experience | Faulty reasoning — statistical, information-processing or memory errors |
| Workbook examples | Loss aversion, stereotyping, overconfidence, endowment, status quo | Mental accounting, framing, anchoring |
| Can vigilance fix it? | Harder — often protective | Less likely if people remain vigilant |
Anchoring is a cognitive error. The workbook describes cognitive biases as a short-cut approach to decision making — avoiding the pain of analysing and evaluating options — which can at times be factually incorrect.
The mechanism is insufficient adjustment. New information does move the investor's estimate, but not far enough, because it is always measured as a distance from the anchor rather than evaluated on its own.
A worked example
Illustrative figures. Kiran bought 1,000 shares of a listed auto maker at ₹1,200 — ₹12 lakh.
Twelve months later:
- A new competitor has taken market share, and consensus earnings estimates are down 35%.
- The stock trades at ₹800.
- Kiran's own re-worked valuation, using the new earnings, comes out at about ₹700.
His reaction: "It's already fallen ₹400 — it's cheap at ₹800. I'll add more, and sell everything once it's back to ₹1,200."
The anchor (₹1,200) is doing all the work. He judges ₹800 as "cheap" relative to what he paid, not relative to what the business is now worth. His own analysis says the stock is ₹100 above fair value, and he is treating it as ₹400 below.
If he buys another 500 shares at ₹800 (₹4 lakh) and the price converges to ₹700, the addition alone loses ₹50,000. A portfolio manager's checklist that asks "would we buy this at today's price on today's numbers?" — with the cost price removed from the screen — is the discipline the workbook recommends.
Why NISM asks about it
Chapter 14 (Behavioural Finance), section 14.3.2, lists anchoring among the cognitive errors with the negotiation and past-performance examples. The first Chapter 14 sample question asks what anchoring bias relies on — pre-existing information. Expect it in matching questions that pair each bias with its description or its category.
Common exam traps
- Anchoring = relying on pre-existing information — the sample question's exact answer.
- It is a cognitive error, alongside mental accounting and framing. Loss aversion, overconfidence, endowment and status quo are emotional biases in the workbook.
- Anchoring vs framing: framing is about how a question is presented; anchoring is about an initial number or fact that later judgements are tied to.
- Anchoring vs disposition effect: holding a loser "until it gets back to cost" involves both — the cost is the anchor, and refusing to realise the loss is loss aversion.
- The workbook's view of mitigation: biases cannot be eliminated, but discipline and checklists help.
Where this is taught
- Series XXI-B · Chapter 14: Behavioural Financeintroduced here
- Series X-B · Chapter 16: Basics of Behavioral Financeintroduced here
Related terms
- Disposition effectInvestors' tendency to sell winning investments too early and hold losing ones too long — named by Shefrin and Statman (1985) and rooted in loss aversion.
- Overconfidence biasAn emotional bias in which people place unwarranted faith in their own judgement and abilities — leading to underestimated risk, concentrated portfolios and excessive trading.
- Prospect theoryKahneman and Tversky's 1979 theory of choice under risk: outcomes are judged as gains or losses from a reference point, and losses hurt more than equal gains please.
- Mental accountingA cognitive error in which people treat equal sums of money differently depending on where they came from or what they are earmarked for, instead of treating all money as interchangeable.
- Bounded rationalityHerbert Simon's idea that people with limited time, information and processing ability settle for a satisfactory and sufficient choice — they 'satisfice' — instead of finding the optimal one.
- Framing biasA cognitive error in which a person answers the same question differently depending on how it is presented — for example, "0% fat" versus "100% fat free".
- Stereotyping biasAn emotional bias in which investors judge an investment by a general, surface-level impression instead of its actual merits — such as assuming a high-profile manager guarantees a well-run company.
- Redhead conditionsKeith Redhead's (2008) list of 5 conditions that make a speculative bubble more likely to emerge — inexperienced traders, high valuation uncertainty, asymmetric payoffs, easy borrowing and difficult short selling.
- AnchoringA behavioural bias where an investor clings to a piece of information — often a past price — and keeps basing decisions on it even after it has stopped being relevant.