# Anchoring bias

Anchoring bias is the tendency to rely too heavily on an initial number or reference point when judging new information, even when that reference point is no longer relevant.

## What it means

A price can become a mental reference point long after the information behind it has changed. In trading, that reference might be a purchase price, a recent high, an analyst’s price target or the first quote someone saw. Anchoring bias occurs when that number receives more weight than its relevance warrants.

An anchor is not automatically useless. A purchase price matters for calculating an investor’s gain or loss, and a recent price may help describe a stock’s history. The mistake is treating either number as proof of what the stock is worth now. New information about the company, market conditions and trading costs may matter more to the decision at hand.

## How it is calculated

Anchoring bias has no standard formula or universal score. One way to make a possible anchor visible is to compare a stated price judgment with the reference price:

`Anchor gap (%) = (stated price judgment − anchor price) / anchor price × 100`

- **Stated price judgment** is the price, in US$ per share, that a person says seems reasonable for the comparison. It is an opinion, not a measured fair value.
- **Anchor price** is the initial reference, also in US$ per share.
- **Anchor gap** is the difference expressed as a percentage of the anchor price. A positive result means the judgment is above the anchor; a negative result means it is below.

The gap describes two numbers; it does **not** measure how biased the person is. To test whether an anchor may have influenced a judgment, the person would need to examine their reasoning and the information available without treating the reference price as an answer.

## Worked example

Suppose a hypothetical investor bought a stock for US$100 per share. The stock now trades at US$70 after the company reports weaker results. The investor says, “US$90 still seems like a reasonable price,” largely because it is below the original purchase price.

1. Identify the possible anchor: the US$100 purchase price.
2. Record the stated judgment: US$90 per share.
3. Calculate the gap: `(US$90 − US$100) / US$100 × 100 = −10%`.
4. Compare the judgment with the current quote: `(US$90 − US$70) / US$70 × 100 ≈ 28.6%`.

These calculations do not show that US$90 is right or wrong. They show how close the judgment remains to the purchase price despite a different current quote and new company information. A check would ask what evidence supports US$90 **without** relying on the investor’s cost basis. The example’s prices are hypothetical, not a price forecast.

## Why it matters before you trade

An anchor can shape decisions about whether to enter a position, change its size or set an execution condition. Someone focused on a previous high might call a lower current price “cheap” without examining why it fell. Someone focused on their purchase price might overlook present risk while waiting to break even.

Before placing an order, it can help to write down the proposed action and its reason, then identify every reference number in that reasoning. Ask what the number actually measures: a historical trade, a quoted price, an analyst opinion or a current estimate? Also separate the question of whether the stock fits the intended basket from the question of how an order might execute. A plausible investment case does not eliminate spread, market impact or other execution costs.

## How PreTrAIde uses it

The product facts do not state that PreTrAIde detects, scores or corrects anchoring bias. Its pre-trade analysis gives a separate check before any order is placed: a user builds a stock basket with sides, quantities and execution conditions, and PreTrAIde returns GO, NO-GO or MODIFY verdicts with reasoning, risk assessments and suggested execution strategies. Those verdicts are decision support, not recommendations.

Its quantitative layer includes estimated spread, market impact, volatility, liquidity and basket concentration measures. Those measures can put an order’s execution conditions and risks in view alongside a personally meaningful price. They cannot determine whether that price has biased the user’s judgment.

## Common mistakes

- **Calling every reference price an anchor.** The issue is undue reliance, not the mere use of historical data.
- **Treating a purchase price as a valuation.** It records what was paid, not what a share is worth today.
- **Reading the anchor gap as a bias score.** A small or large gap alone cannot establish anchoring.
- **Replacing one anchor with another.** A current quote or price target also needs context; neither settles a valuation question by itself.
- **Ignoring execution.** Even a carefully examined price judgment is separate from the cost and conditions of a proposed trade.

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Source: https://pretraide.com/glossary/anchoring-bias