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.


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.

  1. Organizational Behavior - OB

    Organizational Behavior (OB) is the study of the way people interact ...
  2. Frame Dependence

    The human tendency to view a scenario differently depending on ...
  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. Risk Averse

    A description of an investor who, when faced with two investments ...
  6. Mental Accounting

    An economic concept established by economist Richard Thaler, ...
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. Investing Basics

    3 Key Signs Of A Market Top

    When stocks rise or fall, the financial fate of investors change, as well. There are certain signs that can reveal a stock’s course, and investors don’t need to be experts to spot them.
  7. Investing Basics

    Tops Tips for Trading ETFs

    A look at two different trading strategies for ETFs - one for investors and the other for active traders.
  8. Investing News

    6 Signs You Are Addicted To Investing

    An addiction to trading can ruin your life and relationships. Not to mention the monetary costs. There are telltale signs that you've gone too far.
  9. Investing

    3 Reasons to Ignore Market Volatility

    If you can keep your head while those about you are losing theirs, you can make a nice return in roiling markets.
  10. Investing Basics

    How to Know When it's Time to Sell a Stock

    Knowing when to sell a stock isn't always easy. Keep in mind these tips to help you know when to say when.
  1. How do mutual funds split?

    Mutual funds split in the same way that individual stocks split, but less often. Like a stock split, mutual fund splits do ... Read Full Answer >>
  2. 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 >>
  3. 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 >>
  4. 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 >>
  5. 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 >>
  6. 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 >>

You May Also Like

Hot Definitions
  1. Zero-Sum Game

    A situation in which one person’s gain is equivalent to another’s loss, so that the net change in wealth or benefit is zero. ...
  2. Capitalization Rate

    The rate of return on a real estate investment property based on the income that the property is expected to generate.
  3. Gross Profit

    A company's total revenue (equivalent to total sales) minus the cost of goods sold. Gross profit is the profit a company ...
  4. Revenue

    The amount of money that a company actually receives during a specific period, including discounts and deductions for returned ...
  5. Normal Profit

    An economic condition occurring when the difference between a firm’s total revenue and total cost is equal to zero.
  6. Operating Cost

    Expenses associated with the maintenance and administration of a business on a day-to-day basis.
Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!