Anchoring

The Bias

Anchoring, documented by Kahneman and Tversky in the 1970s and detailed in Thinking, Fast and Slow (2011), describes how an initial number — even an arbitrary one — pulls subsequent judgments toward it. In markets the anchor is rarely arbitrary in origin but is arbitrary in relevance: a purchase price, a 52-week high, or a round number like $100 all feel like meaningful reference points because they are memorable and salient, not because the business's worth has any relationship to them. The bias is not a failure to know better — experiments show people who are told the anchor is meaningless still get pulled toward it — which is why anchoring survives even in experienced investors who can recite the theory perfectly.

How Anchors Distort Decisions

Anchoring shows up most visibly in add and exit decisions: a position is judged against what was paid for it rather than against its current prospects, so "back to breakeven" becomes a target that has nothing to do with whether the business improved in the meantime. A prior high anchors expectations of where a stock "should" trade again, regardless of whether the fundamentals that produced that high still hold today. The distortion compounds with loss aversion — the anchor supplies the reference point, and the asymmetric weight of losses relative to that point supplies the reluctance to act on it, which is why the two biases are so often discussed together rather than separately. A price target set purely from a memorable past number, without reference to any change in the business itself, is the clearest tell that an anchor rather than an analysis is doing the work.

Anchors vs. Technically Meaningful Levels

Not every reference price is anchoring — a level that repeatedly attracted buying or selling and coincides with structural analysis can carry genuine information, distinct from a price that matters only because it is where an investor happened to enter. Distinguishing the two is the practical test: does the level reflect where the crowd has previously acted across many participants, or only where this particular reader once did, a distinction that requires looking at the chart rather than at a personal trade history. See Market Regime for how Closelook frames levels at the index level rather than the individual-position level, which sidesteps the personal-anchor problem by construction — an index has no purchase price to anchor on, only a computed regime read.