Anchoring Bias in Investment

Anchoring bias happens when you fixate on a specific number, price, or past value and use it as a reference point for future decisions. In investing, this can lead you to hold losing investments for too long or miss opportunities because you remain attached to an old price.

• Anchoring bias meaning: You depend too much on an initial piece of information when making decisions.
• Common anchor: A stock's previous high price, purchase price, or target price.
• Investment impact: It can affect buying, selling, and portfolio allocation decisions.
• Behavioural finance bias: Anchoring bias is one of the most common behavioural finance biases affecting investors.
• Risk consideration: Investment decisions should consider current fundamentals, not historical price anchors.
• Platform access: The Bajaj Broking website offers access to 4,000+ mutual fund schemes through SIP and lumpsum investment modes. SIPs can start from Rs. 100 per month.

You can start your mutual fund investment journey on the Bajaj Broking website by completing KYC, exploring 4,000+ schemes across categories, and choosing a SIP or lumpsum investment option.

Anchoring bias is a cognitive bias where you place excessive importance on the first piece of information you receive. This information becomes your "anchor" and influences future decisions, even when new information becomes available.

In investing, the anchor is often a purchase price, a previous market high, a target price, or a past NAV. Instead of evaluating current market conditions, you may continue comparing everything to that original reference point.

Anchoring bias example

Suppose you bought a stock at Rs. 1,000 per share. The price falls to Rs. 700. Even if the company's business outlook weakens, you may refuse to sell because you are anchored to the Rs. 1,000 purchase price.

Similarly, if a mutual fund's NAV was once higher, you may assume it will automatically return to that level, even though market conditions have changed.

Anchoring bias works because your brain uses shortcuts to process information quickly. The first number or reference point you see becomes a benchmark for later decisions.

The process typically follows these steps:

1. You encounter an initial value or price.
2. Your mind treats that value as important.
3. New information is compared against that anchor.
4. You adjust your decisions around the anchor instead of analysing current facts.
5. This may lead to poor investment choices.

In behavioural finance, anchoring bias often affects both new and experienced investors because emotional attachment to an anchor can override objective analysis.

Anchoring bias can affect several investment decisions and behaviours.

• Holding losing investments - You may continue holding an investment because you want it to return to the price at which you bought it. This can prevent objective decision-making.
• Missing investment opportunities - You may avoid investing because current prices appear expensive compared to a past price, even when the investment still has long-term potential.
• Ignoring changing fundamentals - Anchoring can make you focus on historical prices rather than factors such as earnings growth, business quality, asset allocation, or market conditions.
• Mutual fund investing and anchoring - When selecting mutual funds, it is important to evaluate factors such as:

SEBI requires all mutual funds to display a riskometer ranging from Low, Low to Moderate, Moderate, Moderately High, High, to Very High. This helps you evaluate risk using current information rather than relying on anchors.

You can reduce the effect of anchoring bias by following a structured investment process.

• Focus on current data - Review current business performance, economic conditions, portfolio allocation, and risk factors instead of relying on historical prices.
• Create investment rules - Define clear rules for buying, holding, and selling investments. Written rules can reduce emotional decisions.
• Use diversification - A diversified portfolio can reduce the impact of emotional attachment to any single investment.
• Review investments regularly - Periodic portfolio reviews help you assess whether investments still align with your goals rather than with old price references.

How can you invest with a structured approach?

A disciplined investment process can help reduce behavioural biases.

1. Complete your KYC process, which is mandatory under SEBI regulations.
2. Log in to the Bajaj Broking website and access the mutual fund section.
3. Compare schemes across equity, debt, hybrid, ELSS, thematic, and NFO categories.
4. Evaluate the SEBI riskometer and fund objectives before investing.
5. Choose SIP or lumpsum mode based on your financial goals.
6. Start investing with SIP amounts from Rs. 100 per month where applicable.
7. Track investments using Dashboard, Portfolio, Orders, and MF Profile tools available on the platform.

Anchoring bias is a common behavioural finance bias that can affect how you buy, hold, or sell investments. By focusing on current information rather than past prices, you can make more rational investment decisions.

Whether you invest in stocks or mutual funds, understanding the anchoring effect can help you avoid emotional decision-making. On the Bajaj Broking website, you can compare 4,000+ mutual fund schemes, evaluate risk levels, and invest through SIP or lumpsum modes based on your financial goals.