Anchoring on Purchase Price Mistakes

Intermediate | Published: 2025-12-28

Why It Matters

Anchoring on purchase price—the tendency to evaluate stocks relative to what you paid rather than their current fundamental value—creates a predictable pattern: you hold losers waiting for 'breakeven', you sell winners too early when they exceed your anchor, and you make different decisions today based on arbitrary past prices. In housing market data, properties with higher purchase-price anchors stayed on market 50% longer than comparable properties with lower anchors (Genesove & Mayer, 2001)—sellers couldn't accept prices below their mental reference point.

The practical antidote isn't willpower. It's the purchase price blind test: Would I buy this stock TODAY at current price? If no → sell, regardless of what you paid.

Definition and Core Concept

Anchoring is the cognitive bias where an initial piece of information (the "anchor") disproportionately influences subsequent judgments, even when the anchor is irrelevant (Tversky & Kahneman, 1974). In investing, your purchase price becomes a powerful anchor, making you evaluate the investment relative to what you paid rather than what it's worth today.

Two predictable distortions follow:

• Below anchor: "I'll hold until it gets back to my price" (waiting for breakeven)
• Above anchor: "It's expensive now, up X% from my purchase" (premature selling)

Both ignore the fundamental question: What is this worth TODAY?

Reference Point Dominance (Why Arbitrary Numbers Control Decisions)

Anchoring is System 1's shortcut for valuation: start with a number (purchase price), make small adjustments. Rules force System 2 to ask: "What's this worth TODAY, independent of what I paid?"

The mechanism (Shefrin & Statman, 1985): purchase price serves as the reference point for all subsequent gain/loss evaluations. You don't evaluate the stock as "worth $50" or "overvalued"; you evaluate it as "down 20% from my purchase" or "up 30% from my cost."

Related Concepts (Use These to Think Clearly)

• Anchoring bias: the cognitive distortion—over-relying on initial reference point (anchor)
• Insufficient adjustment: the mechanism—starting from anchor but failing to adjust adequately toward true value
• Reference point dependence: the behavioral manifestation—evaluating outcomes as gains/losses relative to reference, not absolute value

A useful causal chain: Anchoring (driver) → Insufficient adjustment (mechanism) → Reference point dependence (behavior) → Irrational hold/sell decisions

Kaustia & Knüpfer (2008) show even IPO prices become anchors: investors who experienced positive returns from one IPO were more likely to subscribe to future IPOs—the first price anchored their expectations.

How Anchoring Shows Up in Portfolios

Example 1: Waiting for 'Breakeven' on a Deteriorating Stock (when the anchor controls you)

Scenario: You buy Peloton (PTON) in January 2021 at $150 (100 shares = $15,000 invested).

Investment thesis: COVID tailwinds, digital fitness growth trend

Phase 1: Initial Decline (June 2021)

• Stock falls to $120 (-20%)
• Your thinking: "I'll hold until it gets back to $150"
• The anchor is set: $150 purchase price now controls all future decisions

Phase 2: Fundamental Deterioration (Sept-Dec 2021)

• Sept 2021: Growth slows, guidance cut → Stock at $100 (-33%)
• Dec 2021: Subscriber churn increases → Stock at $70 (-53%)
• New information: COVID tailwinds reversing, gyms reopening, competition increasing
• Rational valuation: Fair value now $40-60 based on revised fundamentals

What you do (anchor-based thinking):

• Still holding, waiting for $150 (your anchor)
• Mental model: "It's a $150 stock, just temporarily down"
• Question you should ask: "Would I BUY at $70 today?" → Answer: No
• Question you actually ask: "Will it get back to $150?" → Anchor-based, not fundamental

Phase 3: Anchor Paralysis (June 2022)

• Stock at $40 (-73%)
• Your thinking: "If I sell now, I'll lose $110 per share. But if I wait..."
• Rational question ignored: "Is this worth $40 today based on current fundamentals?"
• Alternative focus: Waiting for return to $150 anchor

Final Outcome (Dec 2023):

• Stock stabilizes at $30 (-80% from your anchor)
• Position value: (100 × 30 = 3{,}000)
• Loss: $12,000 from initial investment

Opportunity cost:

• If sold at $70 and reinvested in S&P 500 (which rose +40% over the period):
• (7{,}000 × 1.40 = 9{,}800)
• Additional loss from anchoring: $6,800 ($9,800 vs $3,000)

The practical point: Your $150 purchase price was the most irrelevant number for deciding whether to hold at $120, $100, $70, or $40—yet it was the ONLY number that mattered to you. The anchor prevented rational selling at multiple points despite deteriorating fundamentals.

Anchor-free alternative:

• June 2021: Ask: "Would I buy at $120 knowing what I know now?" → No → Sell
• Or Sept 2021: Fundamentals deteriorate → Sell at $100 based on thesis breakdown
• Result: Limit loss to -20% or -33% instead of -80%

Note: Peloton's actual price path was similar to this example; specific dates illustrative of the behavioral pattern common across deteriorating holdings.

Example 2: The IPO Anchor Trap (when first price controls all future views)

Scenario: Uber IPOs at $45 in May 2019. You don't buy at IPO, waiting to "see how it trades."

Phase 1: The Anchor Sets (Even Though You Didn't Buy)

• IPO price: $45
• Psychological anchor: $45 becomes your reference point, even though you didn't buy
• Mental model: IPO price = "fair value" (arbitrary assumption)

Phase 2: The 'Discount' Buy (August 2019)

• Stock at $32 (-29% from IPO)
• Your thinking: "It's cheap now, down 29% from IPO price"
• Anchor influence: You're valuing relative to $45 IPO, not fundamental analysis
• Action: Buy 200 shares at $32 = $6,400 invested

Phase 3: Double Anchor Problem (March 2020)

• COVID crash → Stock at $14 (-69% from your $32 purchase)
• Now anchored on TWO prices: $45 IPO, $32 purchase
• Your thinking: "IPO was $45, I bought at $32, now $14 = massive discount"
• Rational analysis ignored: Pandemic fundamentally changed rideshare economics
• Should ask: "What's Uber worth in a world with 80% less mobility?"
• Actually thinking: "It's down from both anchors = must be cheap"

Phase 4: Recovery and Anchor-Based Exit (2021)

• Stock recovers to $60
• vs IPO anchor: "$60 vs $45 = expensive, up 33% from IPO"
• vs purchase anchor: "$60 vs $32 = great, up 88%, should sell"
• Rational analysis: $60 might be fair value based on 2021 fundamentals (post-pandemic recovery)
• Your action: Sell at $60 because "it's above IPO price and I'm up 88%"

What happened next:

• Stock continued to $70, then stabilized around $65
• You sold too early (anchor-based decision)

Quantified impact:

• Bought at $32 (anchored on $45 IPO "discount")
• Sold at $60 (anchored on $32 purchase and $45 IPO)
• Better approach: Ignore both anchors, value on 2021 fundamentals → hold to $65-70
• Cost of anchors: ~$1,000-2,000 opportunity cost from anchor-based entry and exit timing

The durable lesson: IPO prices and purchase prices are arbitrary anchors; they tell you nothing about current fundamental value. The stock doesn't "know" what price it should "get back to."

Quantified Decision Rules (Defaults, not prescriptions)

These are starting points to counter measurable anchoring. Adjust for your situation, but maintain the core discipline of anchor-free valuation.

The Purchase Price Blind Test (forcing function)

Before any hold/sell decision, answer: "If I had $X cash today, would I buy this stock at current price?"

Rationale: Forces valuation independent of purchase price anchor.

Professional-grade upgrade:

• Quarterly review: For each position, write fresh investment thesis without looking at cost basis first
• Only AFTER writing thesis, check: "Does my current holding match my thesis?"
• If thesis says "sell" but you're holding → anchoring on purchase price

Default rule: If answer is "no" to buying today, default is sell (unless specific reasons: taxes, lockup, high transaction costs).

Cost Basis Concealment (behavioral circuit breaker)

Hide purchase price from brokerage display; show only current value and position size.

Rationale: What you can't see can't anchor you.

Professional-grade configuration:

• Show: Shares held, current price, total value
• Hide: Cost basis, % gain/loss, $ gain/loss

Customization: Especially important for tax-deferred accounts (IRAs, 401ks), where cost basis is irrelevant for tax decisions.

52-Week High/Low Anchor Awareness (common trap)

Never use phrases like: "down X% from 52-week high" or "up X% from 52-week low" in investment reasoning.

Rationale: 52-week high/low are arbitrary time-based anchors; they're not valuation benchmarks.

The test: Would this stock be more attractive if I changed the lookback to 51 weeks? 53 weeks? 2 years? This proves the anchor is arbitrary.

Fundamental Anchor Replacement (default starting point)

Replace arbitrary anchors (purchase price, IPO price) with fundamental anchors (P/E vs 10-year average, price/sales vs sector).

Rationale: If you need a reference point, use one based on fundamentals, not arbitrary historical prices.

Professional-grade upgrade:

• Track: "Current P/E vs 10-year average P/E"
• NOT: "Current price vs my purchase price"

Mitigation Checklist (tiered)

Essential (high ROI)

• □ Before every sell decision: "Would I buy this stock TODAY at current price?"
• □ Hide cost basis from portfolio display (show current value only)
• □ Document investment thesis without referencing purchase price
• □ Set price alerts based on fundamental metrics, not distance from purchase price

High-impact (workflow + automation)

• □ Quarterly blind review: value each position fresh without seeing cost basis
• □ Replace "% from purchase price" with "P/E vs 10-year average" in analysis
• □ Track "would-buy-today" score for each position (1-10 scale, independent of cost)
• □ Ignore 52-week high/low ranges (arbitrary time anchors)

Optional (diagnostic tools)

• □ Monthly self-test: "Am I holding anything I wouldn't buy today?" (if yes → sell or explain)
• □ Purchase price blind test: Have someone tell you holdings without cost basis, rate buy/hold/sell
• □ Accountability partner: Explain holding rationale without mentioning purchase price

Detection Signals (how you know it's affecting you)

• You're using phrases like "waiting to get back to breakeven"
• Your sell targets are round numbers near your purchase price ($100, $50, etc.)
• You evaluate stocks as "up/down X%" from purchase rather than "cheap/expensive" on fundamentals
• You're more willing to buy stocks "down 30%" than "up 30%" from arbitrary reference
• You can't explain hold rationale without mentioning what you paid
• Different purchase prices would lead to different hold/sell decisions today

Measurement Framework (make it measurable)

Anchor Dependency Score

Method: For each position, ask: "If my purchase price were 50% higher/lower, would I make same decision?"

Interpretation:

• Healthy: Decision unchanged by hypothetical purchase price (anchor-free)
• Warning: Decision would change materially (anchor-dependent)
• Critical: Can't make decision without knowing purchase price (anchor-dominated)

Would-Buy-Today Alignment

Formula: Count positions where: (Currently holding) AND (Would NOT buy today at current price)

Interpretation:

• Healthy: 0 positions (perfect alignment)
• Warning: 1-2 positions (some anchor influence)
• Critical: >3 positions (anchor paralysis across portfolio)

Practical note: Most investors have 2-5 positions they're holding solely due to purchase price anchors. Finding them is the first step to fixing the problem.

Reference Language Audit

Method: Review your last 10 investment notes; count mentions of "purchase price" vs "fair value"

Calculation: Purchase price mentions ÷ Total valuation mentions

Interpretation: Score >50% suggests anchoring dominates fundamental analysis.

Diagnostic Exercises (Use These to Test Yourself)

Exercise 1: The Purchase Price Blind Test

Instructions:

1. List your current holdings (ticker symbols only)
2. For EACH holding, write: Buy / Hold / Sell recommendation
3. NOW look up your actual cost basis
4. Compare: Did your recommendation match your current holding?

Interpretation: If you rated "Sell" but are still holding, anchoring on purchase price is preventing rational action.

Exercise 2: The Reversed Anchor Test

Instructions:

1. Pick a position you're holding
2. Imagine you bought it at 2x current price (higher anchor)
   • Would you still hold, or would you "cut losses"?
3. Now imagine you bought at 0.5x current price (lower anchor)
   • Would you still hold, or would you "take profits"?

Interpretation: If different purchase prices → different decisions, you're anchored. (Decision should be SAME if based on fundamentals.)

Exercise 3: The Fresh Eyes Test

Instructions:

1. Ask: "If I inherited this portfolio today (didn't choose purchase prices), what would I change?"
2. List specific positions you'd sell
3. Now ask: "Why am I not selling those today?"

Interpretation: Answer is usually: "Because I'd realize a loss" = anchoring on purchase price.

When Anchors Are Useful (the nuance)

Purchase price isn't always irrelevant. Anchors have legitimate uses:

Legitimate uses:

• Tax planning: Purchase price determines short-term vs long-term capital gains treatment (real tax consequence)
• Performance tracking: Purchase price needed to calculate returns (measurement, not decision input)
• Regulatory reporting: Cost basis required for legal/accounting (compliance, not valuation)

The test: Is the anchor (purchase price) CAUSING my decision, or just MEASURING the outcome?

If causing → anchor bias. If measuring → legitimate use.

Case Studies (Anchoring in Real Markets)

Housing Market 2008 (When Sellers Refused Market-Clearing Prices)

Manifestation: Homeowners anchored on 2006 peak prices, refused to sell below purchase price.

Quantified impact (Genesove & Mayer, 2001): Properties with higher purchase-price anchors stayed on market 50% longer than comparable properties with lower anchors.

Outcome: Many foreclosures because owners wouldn't accept market-clearing prices below anchor.

The lesson: Anchoring on purchase price in declining market = inventory stays high, prices stay depressed longer. The anchor prevented rational price discovery.

Dotcom IPO Anchors (1999-2001)

Manifestation: Investors anchored on IPO prices: Pets.com ($11), Webvan ($15), eToys ($20).

Behavior: Bought "discounts" at 50% below IPO anchor, ignored deteriorating fundamentals.

Outcome: All three went bankrupt; IPO price was irrelevant anchor.

The lesson: IPO price is arbitrary (set by bankers for selling, not fundamental value)—worthless as valuation anchor.

Common Rationalizations and Reality Checks

"I'm waiting to get back to breakeven before I sell"

Reality: The stock doesn't know you own it. Your breakeven price is irrelevant to its future returns.

Counter: Ask: "Would I buy this stock today at current price?" If no → sell, regardless of purchase price.

"It's cheap—down 40% from where I bought it"

Reality: "Down from purchase price" is not the same as "cheap." The stock could be down 40% and still overvalued.

Counter: Ask: "What's the fair value TODAY based on current fundamentals?" Purchase price doesn't answer this.

"I can't sell for a loss"

Reality: The loss already happened (when stock declined). Selling doesn't "create" the loss; it recognizes reality.

Counter: Tax-loss harvesting actually creates tax benefit. Holding a loser to avoid "realizing" the loss is pure anchor bias.

"It was a $150 stock; it will get back there"

Reality: It was a $150 stock when conditions were different. Conditions changed; so did fair value.

Counter: Ask: "What changed in fundamentals since my purchase?" If deteriorated → fair value is lower, regardless of past price.

Next Step (diagnostic exercise)

Run the Purchase Price Blind Test on your portfolio this week:

1. List all holdings (ticker symbols only)
2. For each, write: Buy / Hold / Sell (without looking at cost basis)
3. Now compare to actual positions
4. For any "Sell" rated but still held: write one paragraph explaining why without mentioning purchase price

Interpretation: If you can't explain holding without referencing purchase price, that's the anchor controlling you.

You're not trying to eliminate all selling; you're trying to eliminate anchor-based holding of positions you wouldn't buy today.

Related Articles

• Loss Aversion and How to Counter It
• Recency Bias During Sell-Offs
• Confirmation Bias in Stock Research
• Disposition Effect and Taxable Accounts

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References

Genesove, D., & Mayer, C. (2001). Loss Aversion and Seller Behavior: Evidence from the Housing Market. The Quarterly Journal of Economics, 116(4), 1233-1260. (Homeowners with higher purchase-price anchors held out 50% longer in declining market)

Kaustia, M., & Knüpfer, S. (2008). Do Investors Overweight Personal Experience? Evidence from IPO Subscriptions. The Journal of Finance, 63(6), 2679-2702. (IPO subscription rates influenced by whether investors' previous IPO anchored on positive/negative return)

Shefrin, H., & Statman, M. (1985). The Disposition to Sell Winners Too Early and Ride Losers Too Long: Theory and Evidence. The Journal of Finance, 40(3), 777-790. (Purchase price serves as reference point for gains/losses, distorting sell decisions)

Tversky, A., & Kahneman, D. (1974). Judgment under Uncertainty: Heuristics and Biases. Science, 185(4157), 1124-1131. (People make estimates by starting from initial value and adjusting insufficiently, even when anchor is arbitrary)