In the world of financial investing where every decision is inherently tied to risk and return psychology plays a role that cannot be underestimated. One of the most common yet often overlooked “cognitive traps” is the anchoring effect. Whether you are a newcomer to the investment arena or a seasoned professional, chances are you have been influenced by this bias without even realizing it. So, what exactly is the anchoring effect, and why does it have such a powerful impact on financial behavior?

What Is the Anchoring Effect?

The anchoring effect is a cognitive bias in which individuals place excessive reliance on the first piece of information they receive (known as the “anchor”) when making decisions. Regardless of whether the anchor is reasonable, it becomes a reference point for comparison, valuation, and subsequent actions.
For example, if you know that a stock was once priced at 100,000 VND, you may perceive 80,000 VND as “cheap,” even if the company’s intrinsic value is only around 60,000 VND.

The Anchoring Effect in Financial Investing: A Dangerous Trap

Anchoring to the Initial Purchase Price “Emotionally Stuck” with a Past Figure
When investors buy an asset at price X, they unconsciously treat it as the benchmark value, evaluating all subsequent movements against X. This is closely linked to the concept of loss aversion the tendency to dislike losses more intensely than appreciating equivalent gains. Losing 10 million VND often feels more painful than the joy of gaining 10 million VND.
Many investors anchor their mindset to the purchase price, refusing to cut losses when a stock’s price declines. They wait for the price to return to the “break-even point,” believing that “I haven’t lost until I sell.” But the market does not care about your entry price it simply reflects the asset’s value at the present moment.

Impact: Hinders rational decision-making, leading to prolonged loss-holding and missed opportunities for better returns elsewhere.

Anchoring to Others’ Forecasts or Target Prices
When an analyst claims that stock XYZ will reach 150,000 VND, many investors begin anchoring their expectations to that figure regardless of how market conditions or the company’s fundamentals may change. Humans naturally seek certainty in uncertain environments, making such numbers “tarprice 150,000 VND”) highly persuasive. Once a specific number is heard, it’s easy to anchor expectations to it, regardless of whether the estimate is rigorously calculated.

Impact: Increases subjectivity and reduces independent judgment. Investors become more vulnerable to the “expert authority bias,” over-relying on analysts’ predictions.

Anchoring to the Market’s or a Stock’s Previous Peak
Human psychology tends to believe that the market “will always recover to its peak,” as history has shown recoveries after crises. However, not all assets follow such a recovery cycle. Some weak companies may never return to their previous highs or may take many years to do so. When the market falls from its peak, many investors expect prices to “bounce back” to those highs, so they continue holding or even buying more. They fail to recognize that macroeconomic conditions, interest rates, and industry cycles may have fundamentally changed.
Impact: Investing based on past performance rather than current data, leading to flawed decisions or overlooking major risks.

Anchoring to Short-Term Timeframes
The anchoring effect here manifests in how investors focus excessively on short-term price movements (a few days or weeks), making impulsive decisions instead of following a long-term strategy. This often happens with novice investors or those influenced by groups, chatrooms, or social media. First-time (F0) investors tend to anchor their mindset on short-term fluctuations, for example, assuming that a stock rising for three consecutive sessions indicates an “uptrend,” or that a few days of declines mean a “collapse” is imminent. They overlook fundamental analysis and long-term factors.
Impact: Emotional trading, reactive decision-making, and susceptibility to FOMO-driven buying sprees or panic selling.

Why Does the Anchoring Effect Often Lead to Investment Mistakes?

Anchoring bias does not stem from ignorance, but from the way the human brain processes information. The brain tends to conserve energy by using the initial reference point to guide decisions. In finance where conditions change rapidly rigidly holding onto an “anchor” can cause investors to:

• Cling to outdated numbers instead of reassessing intrinsic value.

• Make emotionally driven, inflexible decisions.

• Miss objective market signals.

How to Overcome the Anchoring Effect in Investing

Continuously Revalue Based on New Data
In investing, everything is in constant flux companies evolve, markets fluctuate, and economies shift. If you cling to an old purchase price or outdated expectations without updating your inputs, you risk falling into self-reassuring illusions, which can lead to serious mistakes in holding, selling, or buying stocks.

The anchoring effect makes investors overvalue old information; therefore, periodic revaluation is the most systematic and rational way to “lift the anchor.”

Establishing Clear Exit Rules
Setting clear exit rules is a crucial strategy that enables investors to manage risk and limit the negative impact of emotions particularly the anchoring effect on financial decision-making. Instead of clinging to the original purchase price or unfounded expectations, investors should establish specific stop-loss and take-profit thresholds based on percentage levels, technical analysis signals, or changes in the company’s fundamentals. Applying predetermined exit rules not only helps minimize losses when the market moves against expectations but also protects investment gains and fosters behavioral discipline. This is a key factor in ensuring decisions are made rationally, objectively, and in alignment with long-term financial goals.

“Re-anchoring” to Intrinsic Value
“Re-anchoring” to intrinsic value is a cognitive strategy that involves deliberately resetting the mental reference point (anchor) in investment thinking, replacing emotional or irrational figures (such as the purchase price, previous peaks, or group-suggested targets) with the actual intrinsic value of the company or cash flow analysis. This re-anchoring not only helps investors escape cognitive biases where decisions are influenced by outdated initial information but also reestablishes a decision-making framework based on updated data and sound financial logic.

In practice, this solution requires investors to regularly reassess the intrinsic value of an asset based on business performance, financial health, and macroeconomic conditions. Only when a new, well-calculated “anchor” rooted in intrinsic value is established can investors make buy, hold, or sell decisions objectively, free from the influence of outdated emotional price points. As a result, investors not only protect their capital from market volatility but also increase the likelihood of achieving sustainable long-term returns.

The anchoring effect is a silent yet highly pervasive enemy in financial behavior. It traps investors in the past, stripping them of cognitive flexibility. However, by cultivating critical thinking, objective quantification, and disciplined execution, we can completely break free from this “psychological chain.” In investing, a wrong decision costs not only money but also opportunity. Make sure you are not anchoring yourself to illusions of the past.