‘Anchoring bias’ in investing

Anchoring Bias is when we anchor ourselves to an old piece of information or to a state of the world that is not real. In this post, I’ll go over a few examples of anchoring bias that I have come across. The goal is to make you, the reader, and me, the writer, aware enough to spot such a bias when we come across it in future.

Anchoring to a specific rate of growth

Someone posted on Reddit that their portfolio XIRR had come down. Though this user had already met their savings target, many Reddit users were advising them to sell their mutual fund holdings only after the XIRR rises back to a reasonable number.

Let’s say we invest expecting a return of 11%. The market is good, and it gives us 17% return until a few months before we plan to cash out. We feel great. But the market sentiment changes suddenly and the rate of growth falters to 12%. If we wait for the growth rate to pick back up to 14 or 15%, then we are anchoring to a specific rate of return. 12% is still better than the expected 11%, so it’s better to follow the original plan and cash out now. Waiting for the value to go up is anchoring bias.

Let’s say I expected to amass ₹5,00,000 from my investments. The investment value becomes ₹7,80,000 one day, but soon falls down to ₹6,10,000. If I cash out now, I still have ₹1,10,000 surplus. If I stay invested, the value may go up to ₹6,80,000 or it may fall further to ₹4,50,000.

Anchoring to the acquisition price

I receive RSUs (restricted stock units) from my employer as a part of my compensation. A recent batch of RSUs vested at the price of $197.57. This was particularly high as the share had seen an uprise in the few days before the vesting date. When the newly vested shares were deposited into my account (T+2 days), the shares were trading at around $191.50.

I sell newly vested RSUs pretty much immediately, but this time I hesitated to sell the shares because the price had fallen.

I didn’t have any specific valuation in mind for these stocks. All I knew was that the price was now lower than it was at the time of vesting. Had the shares vested at $191, I would have gladly sold them for $191.50. My hesitation was only because I was anchoring to the vesting price.

Anchoring to a recent high

I was planning to sell a large number of my old RSUs this month (February 2025) because holding US assets is a bad idea. The price of the shares went up significantly in January, but I couldn’t sell then as the trading window was closed. I could sell in February, but the recent fall in the stock price made me hesitate.

The price of my RSUs has fallen by 5.74% in the trailing month

I lamented the ~6% fall in the past month, but I didn’t consider that the price was up by over 10% in the past 6 months even after the recent fall!

The price of my RSUs has risen by 10.62% in the trailing 6 months period

I was so anchored to the price movement in the past month that I had lost sight of how good the price still was.

Anchoring to tax rules of the past

Tax for gains from bond mutual funds went up significantly on 1-April-2023. Since then, I kept looking for “bond like” mutual funds that are taxed better. It took me close to 2 years to see that “bond like” mutual funds aren’t all that good. I was anchoring to a tax rate that was no longer available.

The impact of anchoring bias

If you are thinking, “What’s the big deal? Investors are humans too, and this is how typical humans behave,” you are right. But you need to be slightly better than typical humans to be a successful investor.

Before we start investing, we make an investment plan considering the risks and rewards. We are usually equanimous while we make the plan. What do we do when a bias gets the better of us? We change the plan on the fly. We dance to the tune of the market. That is not how investing success is achieved.

Modifying the plan mid-way is not a problem in itself. We often need to tweak our plans as we go along. But such changes should be holistic updates done without fear or excitement. Changing course solely based on market movement, arbitrarily changing asset allocation based on market sentiment, etc. don’t usually lead to anything good.

Conclusion

I don’t think it’s practically possible to eliminate all biases. But being cognizant of our biases can help us make better decisions. The ability to avoid biases can often be the difference between a good investor and a mediocre one.