The anchoring bias is relying excessively on the first piece of information ("anchor") that surfaces when making decisions.


Consequence:
• Investors end up holding on to a stock and won't sell, thinking that once it hits its previous highest price, they'll have made money.
• Expecting prices to go unrealistically high or low when purchasing or selling.
• If the same stock was bought at $100 and the current price is trading at $70, an investor could hold on to it until its price goes back up to $100 despite what the market says.
How to Avoid:
• Think about the present situation and possible future instead of focusing on past prices.
• Objective ways of valuing the security include discounted cash flow and P/E ratios.