Anchoring

Anchoring is the tendency for the first number you see to become a reference point that pulls later judgements toward it. The image is a ship unable to drift far from its anchor.

In investing the most common anchor is your own purchase price. The market does not know that number, yet we judge cheap or expensive against it and decide whether to sell.

The 52-week high is another powerful anchor. A price 40% below the high looks cheap, but if that high was itself an overheated figure, there is no reason to use it as a reference.

Sellers exploit this deliberately. Showing an inflated list price beside a discount, or presenting an expensive item before the next one, are both anchoring techniques.

The escape is establishing a new reference. Replacing what did I pay with would I buy at this price if I were seeing it for the first time produces a judgement free of the anchor. Target prices and analyst forecasts anchor too. Adopting such a number without knowing the assumptions behind it means using someone else's assumptions as your own standard.