“Buy low, sell high” is a motto often repeated among investors. But what do “low” or “high” actually mean to us? This is where the anchoring effect comes into play.

First defined by psychologists Amos Tversky and Daniel Kahneman, the anchoring effect explains our cognitive need to establish a reference point in complex situations. In the context of investing, this manifests as a psychological attachment to initial reference points: the purchase price, analyst estimates, past highs and lows, or IPO valuations. Just as we gauge today’s temperature based on yesterday’s reading, investors often use these arbitrary anchors to guide their future decisions—even when market conditions or fundamentals have completely changed.

Research shows that the anchoring effect is extremely persistent. Even when investors receive conflicting information that would logically invalidate the initial anchor, the influence of that first reference point continues to shape their decision-making processes and often leads to financially adverse outcomes.

So, how does the anchoring effect influence our investment habits?

An investor may fixate on the initial price of a stock they purchased, thereby ignoring market conditions or fundamentals. They might hold onto a declining stock in the hope that the price will return to the purchase level, or they might sell a profitable stock prematurely by clinging to an arbitrary target price.

The cryptocurrency market provides a powerful example of the anchor effect in action. Bitcoin surpassed expectations in 2024, breaking through the $100,000 level and rising above $180,000, creating new psychological anchors for investors. While those who remained fixated on the 2021 peak of 87,000 USD were proven right by this massive rally, current investors face the risk of becoming anchored to these unprecedented levels. Analysts are projecting targets in the $200,000–$250,000 range by the end of 2025. However, the danger lies in investors becoming fixated on these recent peaks and making poorly timed decisions during inevitable corrections.

How can investors overcome the anchoring effect?

First, it is essential to acknowledge the existence of this bias. Next, it is important to focus on comprehensive analysis and data-driven insights. While historical data has its place, decisions based solely on broad and up-to-date data have a higher chance of success.

Additionally, adopting a long-term investment strategy can help mitigate the anchoring effect. Focusing on enduring trends prevents investors from getting caught up in temporary fluctuations.

Although the anchoring effect is a cognitive shortcut, understanding its impact and taking conscious steps to reduce it can help investors make more informed decisions in a dynamic investment environment.