Anchoring Bias in Stocks: Why Your Brain Clings to the Original Buy Price

You buy a stock at RM2.00. A few months later, the price drops to RM1.50. The company's fundamentals have deteriorated, the industry outlook is gloomy, yet you dig in: "I'm not selling, I'll wait for it to climb back to RM2.00 first." Sounds like a rational decision? It is actually a psychological trap called anchoring bias - one of the main reasons retail investors on Bursa Malaysia stay stuck with losing stocks for years.

That RM2.00 is just a number. The market does not care what you paid. But your brain does, and it turns that number into an "anchor" that ties down every decision you make afterward. This article explains what anchoring bias is, why the human brain clings so easily to the original buy price, how it shows up in stock investing, and most importantly - how to break free from it.

What Is Anchoring Bias?

Anchoring bias is the mind's tendency to rely too heavily on one piece of initial information (usually the first number we see or set) when making a decision, even when that information is irrelevant to the current situation. The first number becomes the reference point, and every judgment after that is made relative to it.

The concept was introduced by two psychologists, Daniel Kahneman and Amos Tversky, in 1974. According to Investopedia, anchoring occurs when individuals use an initial number or value as the basis of judgment, then make insufficient adjustments away from that starting point. In a stock context, the most common "anchor" is the price you paid when you bought.

The problem is that your buy price is merely a historical fact. It contains no information about the company's true value today, its future prospects, or where the share price will move. But because it is your first "anchor", the brain keeps clinging to it as if its life depends on the rope.

Why Your Brain Clings to the Original Buy Price

Anchoring bias is not a sign that you are stupid or weak. It is a natural feature of how the human brain processes information. There are a few reasons it happens:

1. The brain loves shortcuts (mental shortcut). Evaluating a stock from scratch every single time takes a lot of mental energy - reading financial statements, analysing the industry, calculating intrinsic value. It is easier for the brain to say "the price was RM2.00 before, now it is RM1.50, so it is cheap now." The anchor becomes a lazy but comfortable shortcut.

2. The reference-point effect. Humans judge gains and losses not in absolute terms, but relative to a reference point. Your buy price becomes the zero line - above it is "profit", below it is "loss". As long as the price has not returned to that anchor, the brain refuses to accept a loss.

3. Reluctance to admit a mistake. Selling below your buy price means admitting your original decision was wrong. The human ego hates that admission. So you hold on to the anchor, hoping the market will "correct" your mistake - even though the market never even knew you existed.

This is why anchoring bias is so stubborn. It combines cognitive laziness, the brain's natural way of counting gains and losses, and ego defence in one package. No wonder it is one of the 7 mental biases that most often cost investors money on Bursa Malaysia.

5 Forms of Anchoring Bias in Stock Investing

Anchoring is not just one type. It disguises itself in many forms. Get to know these five so you can catch yourself when you are trapped:

1. The original buy-price anchor

This is the classic one. You buy at RM2.00, and that number becomes an obsession. You refuse to sell below RM2.00 even when the fundamentals have changed. More dangerously, you might "average down" (adding shares as the price falls) not because the company is undervalued, but purely to lower your average buy price so it looks closer to the anchor.

2. The 52-week high anchor

Many investors see the 52-week high as the stock's "real price". When a stock has fallen from RM5.00 (its peak) to RM3.00, they feel it is "cheap" - even though RM3.00 may still be expensive relative to intrinsic value. This peak anchor creates the illusion of a discount that does not exist.

3. The IPO price anchor

A stock that enters the market at an IPO price of RM1.00 is often measured back against that figure. Investors who joined the IPO may cling to RM1.00 as the "original value", even though after listing, the market price and company performance have set a very different value.

4. The round-number anchor

The human brain is drawn to round numbers - RM1.00, RM5.00, RM10.00, or index levels like KLCI 1,600. Investors often set sell or buy targets at these round numbers without any fundamental reason, simply because they "look neat". This is anchoring to a psychological figure, not real value.

5. The analyst target-price anchor

When an analyst sets a target price of RM4.00, many investors make that figure an anchor and refuse to sell before it is reached - even when the company's condition has deteriorated since the report was issued. A target price is an estimate based on assumptions at one point in time, not a promise.

Scientific Evidence: What the Research Says

Anchoring bias is not just theory - it has been documented in dozens of academic studies of the stock market. Here are some key findings:

The 52-week high anchor influences trading behaviour. Behavioural finance research finds that investors are more likely to sell stocks near their historical highs, and more likely to buy stocks near their lows. More interestingly, investors are reluctant to revise their beliefs upward (when good news arrives) if the price is already near the 52-week high. A study in the Pacific-Basin Finance Journal found this anchoring bias is reduced when ownership by more experienced foreign investors rises - showing that sophisticated investors are less prone to the trap.

Even company insiders are exposed. A study in the Financial Review (2024) found that when a share price is near its 52-week high, insiders too hesitate to buy and are more willing to sell - proving that even those with the best inside information are not immune to anchoring.

On Bursa Malaysia, the effect is real. The study "Disposition Effect and Flippers in the Bursa Malaysia" in the Journal of Behavioral Finance found that IPO investors on Bursa Malaysia were 2.64 times more willing to flip winning IPOs than losing ones. This reflects the classic pattern: quick to sell what rises, stubborn to hold what falls - a pattern fuelled by anchoring to the original buy price.

Additional sources such as The Edge Malaysia also stress that biased investment decisions caused by anchoring can lead local investors to miss opportunities and suffer losses that could have been avoided.

Anchoring + Disposition Effect: A Deadly Combo

Anchoring bias rarely travels alone. It often pairs with the "disposition effect" - the tendency to sell winning stocks too early and hold losing stocks too long. Combined, the result is a portfolio full of "zombie stocks": losing positions you hold purely because they have not returned to the buy-price anchor.

The logic breaks down completely. You cut the flowers (winning stocks that could rise further) and water the weeds (losing stocks whose fundamentals are deteriorating). Over time, your portfolio fills up with weak holdings. This is why so many investors "win many small times but lose big once" - their small gains are cut early by anchoring, while their losses are left to grow.

What hurts more is the maths of losses. A stock that falls 50% needs a 100% gain just to break even. The longer you cling to the buy-price anchor while the stock keeps falling, the more impossible recovery becomes - a reality we break down in our article on the maths of losses every investor must know.

Real Example: A Bursa Malaysia Scenario

Imagine Mr Azman buys 10,000 shares of a technology company at RM3.00 each (RM30,000 capital). Six months later, the company loses a major contract, profit drops, and the price falls to RM1.80. At this point, several things happen in Azman's mind:

• Buy-price anchor: "I bought at RM3.00, it's only RM1.80 now. Not back to capital yet, so I haven't really lost." (When the paper loss is already RM12,000.)
• Peak anchor: "This stock used to be RM3.50. RM1.80 is dirt cheap!" (When intrinsic value may be just RM1.20 after losing the contract.)
• Average down: "If I buy another 10,000 shares at RM1.80, my average drops to RM2.40. Easier to break even later." (When he is merely adding exposure to a deteriorating stock.)

A year later, the price is at RM0.90. Azman still holds, still waiting for it to "return to RM3.00". The buy-price anchor has blinded him to a more important question: If I did not own this stock today, would I buy it at the current price? If the answer is no, then holding it is just anchoring, not investing.

How to Detect & Beat Anchoring Bias

The good news is that anchoring bias can be fought with discipline and systems. Here are seven practical strategies:

1. Ask the "would I buy again" question. Every time you make a decision, ask: "If I did not own this stock, would I buy it at today's price?" This question forces the brain to judge based on current value, not the buy-price anchor.

2. Focus on intrinsic value, not buy price. The right anchor should be the company's true value, not your old price. Learn to calculate a stock's fair value - for example through the DCF valuation method to estimate intrinsic value - so you have a reference point grounded in fundamentals.

3. Set a cut-loss rule before you buy. Define your maximum loss level (say -15%) before you enter, and obey it without compromise. A rule set in advance overrides the emotion that shows up later. For troubled-company stocks, read our guide on when to cut loss on PN17/GN3 stocks.

4. Ignore the buy price in your evaluation. Try looking at your portfolio as if you inherited it yesterday at current market prices. Without the buy-price anchor, which ones would you keep?

5. Use data, not round numbers. Do not set targets at RM1.00 or RM5.00 simply because they look neat. Set targets based on fundamental valuation or meaningful technical levels.

6. Write down your investment thesis. Before buying, note why you are buying and what would invalidate that thesis. When the thesis is broken, sell - no matter what the original buy price was. This shifts the anchor from price to logic.

7. Be aware and acknowledge the bias exists. Studies show that awareness alone already reduces a bias's effect. Understanding your own psychology is half the solution - the rest we cover in the 13 emotional traps that can destroy your portfolio.

FAQ

What does anchoring bias mean in stocks?

Anchoring bias in stocks is an investor's tendency to rely too heavily on one reference number - usually the original buy price - when making decisions, even when that number does not reflect the stock's true value today.

Why do I find it so hard to sell losing stocks?

It is a mix of anchoring bias (clinging to the buy price) and reluctance to admit a mistake. Selling below the buy price means officially acknowledging a loss, and the brain rejects that admission while hoping the price "breaks even".

Is averaging down wrong?

Averaging down is not wrong if it is done because the stock is genuinely undervalued relative to intrinsic value. It becomes wrong when it is done purely to lower the average buy price so it looks closer to the anchor - that is anchoring, not analysis.

How do I know I'm affected by anchoring bias?

Clear signs: you cite your buy price when asked whether to sell, you refuse to sell below cost even when fundamentals have changed, or you feel a stock is "cheap" only because it has fallen from its peak. All of these use the anchor, not current value.

Are professional investors also affected by anchoring bias?

Yes. Research shows that even company insiders and institutional investors are exposed to anchoring, though more mildly than retail investors. No one is fully immune; what sets them apart is the system and discipline to fight it.

What is the difference between anchoring bias and the disposition effect?

Anchoring bias is clinging to one reference number. The disposition effect is the behavioural result - selling winning stocks too early and holding losing stocks too long. Anchoring is often the root cause of the disposition effect.

Conclusion

Anchoring bias is one of the subtlest yet most expensive psychological traps in stock investing. The price you paid yesterday has nothing to do with the stock's value today - the market does not care, and neither should you. The key to fighting it is to move your anchor from the buy price to intrinsic value, set rules before emotion enters, and always ask: "Would I buy this stock at today's price?"

Understanding your own psychology is the least-taught yet most important investing skill. The next step is to practise it with the right investment account.

To start investing on Bursa Malaysia as well as overseas stocks such as the US and Hong Kong, you can open a CDS account with Mahersaham and start building your portfolio with discipline.

If you are just starting out, download our free stock market basics ebook to understand the key concepts before investing real money.

Further Reading

• Investor Psychology: 7 Mental Biases That Make You Lose Money on Bursa Malaysia
• A 50% Loss Needs a 100% Gain to Break Even - The Maths of Losses Every Investor Must Know
• PN17 / GN3 Stocks: How to Read Troubled-Company News & When to Cut Loss
• Stock Investing Psychology: 13 Emotional Traps That Can Destroy Your Portfolio
• DCF Valuation for Bursa Investors: How to Calculate Intrinsic Value Like Buffett