Anchoring And Adjustment

Anchoring and adjustment is a cognitive bias in behavioural finance that describes the tendency of investors and traders to rely too heavily on the first piece of information they encounter — the anchor — when making subsequent judgements and decisions, even when that initial reference point is arbitrary or outdated. Once an anchor is established (such as a stock's historical high, its IPO price, or an analyst's target price), all future assessments are made by adjusting from this anchor — but the adjustment is typically insufficient, causing persistent bias in judgement. For example, an investor who bought a stock at ₹500 may refuse to sell at ₹300 because they are anchored to the ₹500 purchase price — even if the fundamental value has genuinely deteriorated to ₹250. In Indian equity markets, anchoring bias is particularly prevalent during market corrections — retail investors anchored to recent 52-week highs resist selling deteriorating positions, hoping prices will 'return to normal' even when business conditions have structurally changed. Similarly, analysts anchored to previous year earnings estimates are often slow to revise targets after a significant earnings miss. Recognising anchoring bias is a fundamental step in developing rational, evidence-based investment decision-making — investors should regularly reassess holdings based on current fundamentals rather than historical cost or price levels.