fastbot
Try it
Back to Blog
·6 min read

Anchoring bias — the investing mistake that distorts decision-making

Anchoring bias: investors rely too heavily on past prices to anchor current decisions. Why "BTC was once $120k so $90k is cheap" is dangerous thinking and how to avoid it.

Anchoring BiasBehavioral FinanceInvesting PsychologyDecision Making

A familiar situation

Many investors have experienced this:

  • A stock falls from $100 to $60
  • A cryptocurrency drops from $5 to $2
  • An ETF declines from $400 to $280

The immediate thought is usually:

"It's already down so much. It must bounce back."

But markets don't work that way. An asset that was once at price X doesn't have to return to X. This is a classic example of anchoring bias — a common and dangerous psychological trap in investing.

What is anchoring bias?

Anchoring occurs when investors rely too heavily on a past price as a reference point for current decisions.

Common examples:

  • "Bitcoin once traded at $120,000, so $90,000 feels cheap"
  • "This stock once traded at a P/E of 30, so a P/E of 20 looks attractive"
  • "I bought this at $50, now it's $30 — I'll wait until it returns to $50 to sell"
  • "It once hit $200, now it's $80 — it should double"

However, markets don't care about historical prices. What matters is current value and future prospects.

How is anchoring different from "support/resistance"?

A common question: "Technical analysis uses past prices — is that anchoring?"

The difference:

  • Support/resistance is based on data many participants share (volume profile, repeatedly tested highs/lows). That's objective data.
  • Anchoring is a personal feeling about a specific price, usually because you remember it or you bought there.

Bitcoin at $120k isn't important support if it was just an intraday spike — but anchoring bias makes many treat it as "fair value".

Why is anchoring dangerous?

1. It encourages premature bottom fishing

Many investors buy simply because an asset has fallen sharply — not because fundamentals are attractive.

"Down 40% from peak → must be cheap" — wrong logic. An asset can fall another 70% if fundamentals deteriorate (broken thesis, industry decline, company mismanagement).

History has many examples:

  • Many cryptocurrencies dropped 95-99% and never recovered
  • Stocks of bankrupt companies went from $100 to $0 — anchoring made many buy at $20 thinking "cheap"

Read: 7 crypto investing mistakes beginners should avoid.

2. It causes investors to hold losing positions too long

Many refuse to sell because they believe prices will return to their purchase level. This combines anchoring + endowment bias + sunk cost fallacy.

Problem: the market doesn't know your entry price. Your entry price is not a benchmark for future prices.

The right question: "With current data, does this asset deserve its current price? Is there upside?" — not "I want to break even".

3. It distorts opportunity assessment

Anchoring makes investors easily ignore strong assets simply because they feel "already too high".

"Nvidia is up 300% from 2023 — too expensive" → many missed it as it gained another 200%.

Anchor to past prices → miss real fundamental assessment. NVDA at $130 may still be cheap relative to 2 years of forward earnings growth — anchoring just blinds you to it.

4. It creates "mental losses" that aren't real

You bought BTC at $30k. Price rises to $120k. Then drops to $90k.

  • Reality: you're up $60k
  • Feeling (due to anchoring to peak $120k): you're "down" $30k

This feeling of loss can push you to panic-sell — even though objectively you're still up significantly.

How to avoid anchoring?

1. Focus on current data instead of old prices

Each evaluation, ask: "With current data — earnings, industry, competitive position, valuation multiples — does this asset deserve its current price?"

Don't ask: "Was it higher before?" — that's the anchoring trap.

2. Evaluate based on future prospects

Investing is about the future, not the past. The past only matters when:

  • Patterns repeat for fundamental reasons (cyclical industries)
  • Historical data informs about management quality, business resilience
  • Long-term trends are still sustained

It doesn't matter when: it's just a high number from the past.

3. Follow a consistent investment process

Process-based investing (vs price-based) naturally reduces anchoring. When you have rules like:

  • "Buy if P/E < 15 + revenue growth > 10%"
  • "Sell if thesis is broken"

You don't decide by "how much has the price dropped" — by "does the data match the rule".

Read: Building an investment process — what separates professionals from the crowd.

4. Ask the reset question

The powerful question to break anchoring:

"If I didn't own this asset today, would I buy it?"

If YES → hold (logic: current price is fair, you would buy here) If NO → consider selling (logic: you wouldn't buy = you shouldn't hold)

This forces you to evaluate purely on current data — not influenced by entry price or peak prices.

5. Document the original thesis

When buying, write down the thesis (see Investment journaling):

  • Why am I buying?
  • What's fair value?
  • Under what conditions would I sell?

Later, evaluate by: "Is the thesis still valid?" — not "How does the price compare to entry?".

6. Reset benchmarks regularly

Each quarter, recompute fair value for positions based on new data — not based on a price you remember.

Example: BTC at $90k — what is fair value now? Based on on-chain metrics, institutional adoption, macro context. Not "BTC was once $120k so fair value is $120k".

Anchoring in contextual cases

Case 1: New bull market after a bear

Anchor: bear market low. "BTC was once $20k, now $50k → expensive".

Reality: at $50k with new fundamentals + new macro context, may still be cheap. Don't anchor to the bottom.

Case 2: After a large drawdown

Anchor: pre-drawdown peak. "Stock was once $200, now $80 → 60% off, cheap".

Reality: the peak may have been a bubble. $80 may still be expensive vs fair value of $50.

Case 3: You bought at a specific price

Anchor: entry price. "I bought at $100, now $70 → I'll wait until it returns to $100 to sell".

Reality: the market doesn't know your entry price. Sell/hold decisions should be based on forward expected return, not "regret minimization".

fastbot — cost basis as reference (not anchor)

fastbot tracks the cost basis of each DCA plan / position. This is a reference (for computing PnL, performance), not something that should become an anchor for decisions.

When looking at a DCA report:

  • ✅ "Total invested $X, current value $Y, PnL $Z" — fact-based
  • ❌ "Must wait for value to return to $X to sell" — anchoring trap

Use data as reference, not as a rule.

Read: What is DCA and why should long-term investors care?.

Conclusion

Past prices are reference information — not predictions of the future. Investment decisions should be based on:

  • Current fair value
  • Forward expected return
  • Risk-adjusted basis

Not on:

  • Prices you remember
  • Historical peaks
  • Your entry price

Investment decisions should be based on the future, not memory. This is one of the most important skills for outperforming markets long-term — and a skill most retail investors haven't developed well.

Next step

Want to track objective portfolio data (cost basis, PnL, allocation) to reduce anchoring in decisions?

👉 Open fastbot — try free for 7 days, no credit card required.