Thus, a rational investor must always try to develop rigorous critical thinking.Ĭritical thinking means that if all are talking good about a stock or any other financial instrument, then one should try to dig out negative points as well. So, they may or may not help investors arrive at the right decision. One issue with the use of anchors is that they do not always give intrinsic value. A few of them could be: Critical Thinking There are psychological and factual ways to avoid this bias.

It is clear that the anchoring bias influences the investment decisions, which may lead to a wrong investment decision. In such cases, it is the anchoring effect that pushes investors to the stock’s purchase price. In this, investors sell the shares whose prices go up and retain those whose prices go down. Disposition bias is also regarded as an anchoring bias effect.Thus, it moves to a new price using the earlier stock price as the anchor. When a company announces its earnings, the stock price usually underreacts to this news. The drift in the prices of stocks after the announcement of financial results or earnings is another common impact of anchoring.These decisions could be ignoring an undervalued investment or holding onto an overvalued investment for more time. Another effect is that it may push investors to make sub-par decisions.This may push them to hold on to the investment for more time than they should.

Due to the anchoring effect, investors relate the fair value of a stock to the current price rather than fundamentals.An anchoring bias, as one can expect, may influence an investor’s decision in several ways.

The anchoring effect