Anchoring Effect: Anchoring Effect Trends In Investing

Anchoring Effect  – one of the psychological factors that can influence daily decisions, especially in investing and trading. So, what exactly is the Anchoring Effect? How does the Anchoring Effect impact stock and forex trading? All will be answered in today’s article.

1. WHAT IS THE ANCHORING EFFECT?

The Anchoring Effect, also known as the anchoring bias or anchor psychology, is a term translated from the English phrase “Anchoring Effect.” It refers to the psychological tendency in which we focus on and are influenced by an initial reference point when evaluating subsequent information. This is why it is named after the anchor – a familiar tool for sailors and fishermen.

An anchor is something that is dropped to keep a ship from drifting due to currents or waves. The mechanism of how an anchor works is similar to the human psychological tendency to let initial impressions influence the formation of further perceptions.

People affected by the anchoring effect tend to fix their thoughts on a specific point or reference information. Decisions are made based on perceived attractiveness rather than thorough analysis of each option.

2. EXAMPLE OF THE ANCHORING EFFECT

We can easily see examples of the anchoring effect in daily life – we just might not call it by that name. Here is one such example of anchoring psychology:

Let’s say you want to buy a new car. After some research on Google, you find the average price of that car is around 1 billion VND. When you visit a car dealership, the price offered is 970 million VND. You agree to the offer because it’s 30 million less than what you had expected. However, later on, you find out that your friend bought the same car at another dealership for only 890 million VND – a price lower than both the average you found and what you paid.

At this point, you might blame yourself for not checking other price options and for making a decision too quickly. The question is: why did you accept the offer so quickly? The anchoring effect shows that we tend to prioritize the first piece of information we receive — in this case, the average price of 1 billion VND. Because of that initial search, you automatically considered 970 million VND a bargain, overlooking the need to check prices at other dealerships. The 1 billion VND figure served as the anchor or anchoring point in your mind.

3. ANCHORING BIAS IN INVESTMENT

And it’s not just in everyday life — examples of the anchoring effect also exist in investing and trading. Anchoring Bias refers to the tendency of investors to make decisions based on initial information or to rely heavily on information they have recently received. These pieces of information may not be logically relevant to the investment decisions being made.

3.1. Anchoring Effect in the Stock Market

The anchoring principle is a part of behavioral finance research, which studies how emotions and other external factors influence investment and trading choices. Research has shown that anchoring points can significantly affect the investment decisions of individual investors. Let’s examine an example of the anchoring effect in the stock market to better understand its impact.

Let’s say you bought ABC stock – a growth stock with good liquidity. However, negative news about the company’s transactions emerges, causing some investors to panic-sell. The stock price plummets from 50,000 VND to 32,000 VND — almost down to your entry price. At that moment, your mind is fixated on the idea that 50,000 VND is the stock’s true value. That price becomes an anchor in your thinking. To you, any price below 50,000 seems like an undervaluation and feels unfair.

In reality, the market is functioning completely normally. And of course, there is no mechanism in place to treat a stock unfairly. The anchoring effect traps your mind at the 50,000 mark, clouding your reasoning and leaving you disappointed.

3.2. The Impact of the Anchoring Effect in Forex Trading

Looking at the analysis and examples of the anchoring effect above, it’s clear that traders’ emotions and psychology can significantly influence investment decisions. However, most successful investment decisions require rational thinking and careful analysis of various factors.

The market is always flooded with information, so it’s essential to be selective. Anchoring often prevents you from making logical decisions. Always remember: the current price is what matters most — don’t let an anchor price from the past overly influence your judgment.

In forex trading as well, no one can guarantee that the market will repeat its historical price patterns. The root of traders’ anchoring psychology often lies in the fear of potential losses. You might enter a position in a currency pair that has recently experienced a significant upward movement. Even if all market conditions remain solid, you may exit the position early because you believe the recent rise or fall won’t last.

4. HOW TO AVOID THE ANCHORING EFFECT?

The anchoring effect is not inherently harmful. However, it’s undeniable that it can negatively influence investment decisions to a certain extent. Below are a few strategies to prevent the anchoring effect from having too strong an impact on your decision-making:

– Acknowledge the anchoring bias: The simplest way to overcome the anchoring effect is to monitor your behavior and identify the anchoring points that tend to influence you. You’ll only begin to see results from this awareness after consistently applying it over time.

– Adjust your anchor point if necessary: As mentioned, anchoring bias is not entirely negative—it can be helpful if aligned with market conditions. What matters is setting an anchor point based on your financial goals and capabilities. More importantly, be willing to adjust it as circumstances change.

– Leverage objective resources: When establishing anchor points, rely on fundamental analysis. In stock trading, set your decision anchors based on company financial reports, competitor analysis, and expert opinions. This approach can also help you assess whether a stock fits well within your portfolio.

5. CONCLUSION

Remember, your anchor point—or more precisely, your initial buying or selling price—has no actual relevance to other factors in the market.

To overcome the anchoring bias, a rational and research-based mindset is essential—emotion alone won’t suffice. Anchoring can happen to anyone, in any context, not just in financial markets. The anchoring principle isn’t inherently bad—as long as you make thoughtful adjustments that align with reality.