Anchoring

AAA

DEFINITION of 'Anchoring'

The use of irrelevant information as a reference for evaluating or estimating some unknown value or information. When anchoring, people base decisions or estimates on events or values known to them, even though these facts may have no bearing on the actual event or value.

INVESTOPEDIA EXPLAINS 'Anchoring'

Here's an everyday example: a friend asks how much you pay in rent for your 800-square-foot apartment, and then asks how much a 1,100-sq-ft apartment would cost to rent in the same building. Would you make an estimate by adding a little more to what you pay even if you've no idea of the actual costs? If so, you would be anchoring your estimate onto what you pay for your apartment.

In the context of investing, investors will tend to hang on to losing investments by waiting for the investment to break even at the price at which it was purchased. Thus, they anchor the value of their investment to the value it once had, and instead of selling it to realize the loss, they take on greater risk by holding it in the hopes it will go back up to its purchase price.

RELATED TERMS
  1. Frame Dependence

    The human tendency to view a scenario differently depending on ...
  2. Organizational Behavior - OB

    The study of the way people interact within groups. Normally ...
  3. Regret Theory

    A theory that says people anticipate regret if they make a wrong ...
  4. Prospect Theory

    A theory that people value gains and losses differently and, ...
  5. Behaviorist

    1. One who accepts or assumes the theory of behaviorism (behavioral ...
  6. Mental Accounting

    An economic concept established by economist Richard Thaler, ...
RELATED FAQS
  1. How does days to cover a short position relate to a short squeeze?

    Days to cover a short position reveals the intensity and duration of a potential short squeeze. A short squeeze occurs when ... Read Full Answer >>
  2. Is it better practice to use a stop order or a limit order?

    Both stop orders and limit orders have their advantages and disadvantages; traders need to decide between the two based on ... Read Full Answer >>
  3. What is the difference between a buy limit and a sell stop order?

    A buy limit order is a specific type of buy order used to enter a market, while a sell-stop order is a sell order that can ... Read Full Answer >>
  4. What is the difference between a short squeeze and a long squeeze?

    A short squeeze and a long squeeze are situations that can force traders and investors out of their positions. A short squeeze ... Read Full Answer >>
  5. Why does the efficient market hypothesis state that technical analysis is bunk?

    The efficient market hypothesis (EMH) suggests that markets are informationally efficient. This means that historical prices ... Read Full Answer >>
  6. What does it mean to be absolutely risk averse?

    Some people are absolutely risk-averse, which means that they cannot tolerate sustaining any sort of loss, even a temporary ... Read Full Answer >>
Related Articles
  1. Active Trading Fundamentals

    4 Psychological Traps That Are Killing Your Portfolio

    Sometimes your largest financial hurdle is our head. Learn about the common mind-traps that trip up investors.
  2. Active Trading Fundamentals

    An Introduction To Consensus Indicators

    Learn how the herd is almost always wrong, or at least late in jumping on the bandwagon.
  3. Active Trading Fundamentals

    An Introduction To Behavioral Finance

    Curious about how emotions and biases affect the market? Find some useful insight here.
  4. Active Trading Fundamentals

    2 Indexes That Help Assess Market Behavior

    The Herrick Payoff Index and New-High New-Low Index are some of the more interesting (and often complex) measures of crowd psychology.
  5. Active Trading Fundamentals

    Behavioral Finance

    Learn the science behind irrational decision making and how you can avoid it.
  6. Trading Strategies

    How To Cover Your Bases After Making A Trade

    Follow up your trade entry with these time-tested risk management strategies.
  7. Chart Advisor

    Commodity Traders are Watching These 3 Charts

    As we head towards the summer months, many commodity traders are looking to diversify their holdings and to protect themselves against inflation.
  8. Trading Strategies

    Micro-Patterns: Looking At The Smaller Picture

    Micro-patterns within trading ranges reveal hidden characteristics of the bull-bear struggle.
  9. Active Trading Fundamentals

    Managing Forex Trading Profits for Better Returns

    How to balance anticipated vs. confirmed trades to manage potential profits and lower risks.
  10. Trading Strategies

    Trading Risks And Rewards In Your Favor

    Measure reward and risk targets before taking a trade, and let those numbers guide your open position.

You May Also Like

Hot Definitions
  1. Unlevered Beta

    A type of metric that compares the risk of an unlevered company to the risk of the market. The unlevered beta is the beta ...
  2. Moving Average - MA

    A widely used indicator in technical analysis that helps smooth out price action by filtering out the “noise” from random ...
  3. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  4. Productivity

    An economic measure of output per unit of input. Inputs include labor and capital, while output is typically measured in ...
  5. Variance

    The spread between numbers in a data set, measuring Variance is calculated by taking the differences between each number ...
  6. Terminal Value - TV

    The value of a bond at maturity, or of an asset at a specified, future valuation date, taking into account factors such as ...
Trading Center