What is anchoring?
Anchoring is a mental habit where, when estimating what something is worth, we start from a number we heard or saw first and then fail to move far enough away from it. It happens even when that number has nothing to do with the question.
This is not stupidity; it is how the human brain makes quick decisions. But in investing, where prices change every day and old numbers are everywhere, this shortcut can pull us in the wrong direction.
Say a shopkeeper at New Market asks Tk 2,000 for a shirt. After hard bargaining you buy it for Tk 1,200 and feel you have won. But next door the same shirt may sell for Tk 800 from the start. Your “win” was measured from the shopkeeper’s first number, not from what the shirt is actually worth. The numbers are only an example.
Why it matters to an investor
- Getting stuck on your buying price: when a share falls below what you paid, you think “I’ll sell once it gets back to my price”, even though the market has no idea what you paid.
- Treating an old high as the “real price”: because it was once Tk 90, Tk 50 feels cheap, even though the company may have changed.
- Using face value or the IPO price as a yardstick: seeing a price near the Tk 10 face value and thinking “it can’t go lower than this”.
- Being tied to rumours or target prices: when someone says “this will hit Tk 200”, the number lodges in your mind even with no reasoning behind it.
The wheel of fortune experiment
In 1974 the psychologists Amos Tversky and Daniel Kahneman ran a striking experiment. A “wheel of fortune” was spun, but it was set to stop at either 10 or 65. Participants were then asked what percentage of United Nations member countries are in Africa.
Those whose wheel stopped at 10 gave a median estimate of 25%. Those whose wheel stopped at 65 gave 45%. Everyone knew the wheel’s number was random, yet it still dragged their answers along. Imagine: if a meaningless number has that much pull, how much more does a number that feels meaningful, like your own buying price?
Habits that loosen the anchor
- Ask yourself: “If I didn’t own this share today, would I buy it at this price?” That question takes your buying price out of the picture.
- Do your own homework before looking at the price: think of a range of value from the company’s earnings, cash and debt first, then check the market price.
- Think in ranges rather than one number: “somewhere between Tk 40 and Tk 60” is safer than fixing on a single figure.
- Write down when you buy why you are buying and when you would sell. Later, decide by those reasons, not by the price you paid.
Worked example
- Say Rina bought a share at Tk 100. The price has fallen 40% and is now Tk 60.
- To get back to Tk 100 it must rise Tk 40 from Tk 60. 40 ÷ 60 ≈ 0.67, a rise of about 67%.
- The market doesn’t know about Rina’s Tk 100. Whether the share rises 67% depends on the company’s business, not on what she paid.
Result: the real question is not “when will it get back to 100?” but “is this company worth holding at today’s Tk 60?” Your buying price only matters for working out your gain or loss; it says nothing about what comes next. The numbers are only an example.
Common mistakes
- Holding a share only in the hope that it returns to your buying price, without looking at the company any more.
- Calling a share “cheap” just because it is far below its old high.
- Starting your own thinking from a target price or a number someone floated in a rumour.
- Thinking “I know about it, so it won’t affect me”. Experiments show anchoring works even when people know the number is meaningless.
The market doesn’t know what you paid: before each decision, ask whether you would buy it fresh at today’s price.