In a now-classic experiment, Daniel Kahneman and Amos Tversky asked participants to spin a rigged roulette wheel — designed to stop at either 10 or 65 — and then estimate the percentage of African countries in the United Nations. Those who had landed on 65 gave systematically higher estimates than those who had landed on 10. The roulette number had no logical connection to the question. And yet it shaped everything.
This experiment illustrates one of the most robust and universal cognitive biases: the anchoring effect. It is not a laboratory curiosity. It is present in your financial decisions every day, usually without you noticing.
What Is the Anchoring Effect
The anchoring effect describes the human brain’s tendency to give disproportionate weight to the first numerical information it receives when making an estimate or a decision. This initial piece of information — the anchor — acts as a reference point from which subsequent judgments do not deviate far enough, even when the information that follows is more relevant or more accurate.
The phenomenon was described by Kahneman and Tversky in 1974 as part of their research on heuristics and cognitive biases, work that later earned Kahneman the Nobel Prize in Economics in 2002. Since then, the anchoring effect has been replicated in hundreds of studies across different contexts: salary negotiations, real estate valuations, medical estimates, legal sentences, and, in especially visible ways, in people’s financial behavior.
What makes anchoring particularly difficult to combat is that it is not triggered only by relevant or reasonable anchors. It works even when the anchor is clearly arbitrary — like a roulette number — when the subject knows it is arbitrary, and when they are explicitly warned about its influence. Knowing it exists is not enough to neutralize it.
How Anchoring Shows Up in Daily Decisions
The most visible place of the anchoring effect in everyday financial life is the crossed-out reference price on any sale item: “Was €89.99. Now €59.99.” The €89.99 is the anchor. Your brain processes the discount relative to that price, not relative to the product’s actual value or what it costs elsewhere. If the “original” price was never a real regular selling price, the anchor works just as well.
Supermarkets use anchoring systematically. A sign saying “Maximum 6 per customer” anchors typical purchase behavior around that number, even though without the sign you would have taken one or two. The perceived limitation activates a bias toward the suggested quantity.
In salary negotiations, whoever makes the first offer establishes the anchor. Studies with recruiters and candidates show that the final salary correlates more strongly with the first figure mentioned than with any subsequent assessment of qualifications, experience, or merit. Experienced negotiators know this well: there is a reason they want to be the one who names the first number.
When buying a car, the salesperson typically starts by showing the most expensive model. The high price anchors your perception, and the mid-range model seems “reasonable” by comparison, even if it is still expensive in absolute terms. The strategy is as old as selling itself: anchor high so that the adjustment ends where the seller wants it to.
In the real estate market, the asking price of a property acts as an anchor for all subsequent offers. Properties listed at higher asking prices tend to sell at higher final prices, even when the asking price was clearly above market value. Buyers adjust away from the anchor, but never far enough.
Anchoring in Investments
In the investing world, anchoring has particularly significant consequences:
The purchase price as anchor. One of the most common manifestations of this bias is the attachment to the price at which you bought a stock or fund. If you bought something at 100 euros and it is now worth 60, you tend to wait to “get back” to 100 before considering selling, even though nothing in rational analysis justifies that level as a reference for the current decision. The purchase price is a historical data point irrelevant to whether you should hold or sell today. What matters is the asset’s future prospects and whether it still makes sense in your portfolio, not what you paid for it in the past.
The historical high as a value reference. When a stock falls 40% from its annual high, many investors automatically perceive it as “cheap” relative to that peak. But that high may have been an anomaly, or simply an overvalued price. The discount from the historical maximum does not indicate intrinsic value: it indicates a relative price versus an arbitrary reference point.
Analyst price targets. Equity research reports typically include a twelve-month price target that acts as an anchor for many investors. If an analyst raises a company’s price target from 20 to 25 euros, many investors perceive that level as the natural ceiling, even when there is no structural reason the company could not be worth 30 or 35 in the future. The price target is an estimate subject to its own biases, not a true value.
Historical interest rates as a reference. An investor who formed their financial intuition in a low-interest-rate environment may consider mortgages at 1.5% or deposits at 0.1% as “normal.” When rates rise to 3.5%, that person perceives them as “high,” even though historically they are moderate. The anchor is one’s own recent experience, not the long historical context.
Entry prices in volatile assets. Anchoring to the purchase price is especially pronounced in highly volatile assets such as cryptocurrencies. Investors who bought bitcoin at 60,000 dollars and saw it fall to 20,000 often waited years for it to “return” to that level before considering selling, ignoring that their entry price has no bearing on the asset’s future value.
Why It’s So Hard to Resist
The anchoring effect is not an intellectual weakness: it is a consequence of how human cognitive processing works. Our reasoning system operates primarily through comparison and adjustment. When we lack sufficient information to accurately estimate the value of something — which is the situation in most real financial decisions — the brain looks for any available numerical reference and adjusts from there.
The problem is that the adjustment is always insufficient. Even when we are aware of the anchor, even when we know we should ignore it, we tend to adjust in the right direction but not far enough. The anchor does not disappear: it simply modulates how far we move away from it.
Experimental research shows that explicit knowledge of the bias reduces, but does not eliminate, its influence. Experts are subject to anchoring to the same degree as novices, especially in domains of high uncertainty. An experienced lawyer who receives a high initial settlement offer ends up negotiating closer to that figure than one who received a low initial offer — even when both know exactly how the mechanism works.
Anchoring is especially persistent because it is activated automatically, before conscious reasoning has a chance to intervene. By the time we consciously analyze whether a number makes sense, the anchor is already established and shaping our starting point.
Strategies to Reduce Its Influence
There is no vaccine against anchoring. But there are concrete practices that reduce its weight in important decisions:
Generate your own estimate before seeing the price. In a negotiation, research the market value of the item before the seller names a price. In equity investing, analyze a company’s fundamentals before looking at its current market price. Having your own anchor — formed through your own data and independent reasoning — reduces the pull of an external anchor when it appears.
Ask whether the anchor is actually relevant. When you detect a number that seems to be shaping your reasoning, ask yourself explicitly: does this number have any bearing on what I am trying to decide? Was the crossed-out price on that offer ever a real regular selling price? Does my purchase price for that stock tell me anything about its future value?
Use multiple independent references. Rather than adjusting from a single anchor, seek several independent reference points. Prices of comparable properties in the same area. Valuation multiples of peer companies. The cost of alternatives. When several anchors of different origin coexist, the individual influence of each is reduced.
Allow time between the first proposal and the decision. Anchoring operates especially under conditions of urgency and pressure. Sellers create artificial time pressure precisely to amplify the effect. Taking some distance — even just a day or two — allows the anchor to lose some of its hold.
Document your reasoning before arriving at a figure. Writing down why something is worth what you think it is worth — before the final number appears — forces you to construct an argument of your own, not derived from the anchor. If you cannot justify the value without mentioning the reference price you saw first, it is a sign that the anchor is conditioning your reasoning too heavily.
The anchoring effect is not a trap set only for the unwary. It is a feature of human cognitive processing that affects everyone, experts included. Recognizing it is not enough to eliminate it, but it is enough to apply a deliberate counterweight in the financial decisions that matter most.
