Anchoring & Confirmation Bias

Two further biases distort not how we feel about gains and losses or how we respond to crowds, but how we process information itself. Anchoring warps the reference points we use to judge value, and confirmation bias warps the evidence we seek and accept. Together they undermine the objective, rational analysis that sound investing requires, and recognizing them helps you think clearly about markets.

Anchoring

Anchoring is the tendency to rely too heavily on the first piece of information encountered, the anchor, when making decisions, allowing that initial reference point to exert undue influence on subsequent judgments. In investing, anchoring takes many forms. An investor may fixate on the price at which they purchased a stock, judging whether to sell based on that purchase price rather than on the stock's current prospects, a connection to the loss aversion and sunk cost issues examined earlier. An investor may anchor to a stock's previous high, reasoning that because it once traded much higher, it must now be cheap, even though the previous high may have been unjustified. People anchor to round numbers, to analyst price targets, and to recent prices, letting these arbitrary reference points distort their assessment of value.

Why anchoring misleads

Anchoring misleads because the anchor is often arbitrary or irrelevant to the question at hand, yet it powerfully shapes judgment nonetheless. The classic error is reasoning that a stock which has fallen from a high price to a lower one is therefore a bargain, when the relevant question is not how far the price has fallen but whether the current price is below the stock's intrinsic value, the forward-looking assessment that Unit 3 emphasized. The previous high tells you nothing about current value, it is merely an anchor that creates a false impression of cheapness. Anchoring to the purchase price similarly distorts sell decisions, tying the investor to a number that, rationally, should have no bearing on whether the investment is worth holding now.

Confirmation bias

Confirmation bias is the tendency to seek out, favor, and remember information that confirms our existing beliefs, while ignoring, discounting, or forgetting information that contradicts them. Once an investor forms a view or takes a position, confirmation bias leads them to gravitate toward news and analysis that support it and to dismiss or rationalize away evidence that challenges it. An investor who owns a stock seeks out bullish opinions and reasons to feel good about the position, while discounting bearish warnings and signs of trouble, effectively building an echo chamber that reinforces the existing view. This selective processing of information prevents the objective reassessment that changing circumstances demand.

We anchor to prices that should not matter and seek only the evidence we want to hear. Objectivity in investing requires actively hunting for what you would rather ignore.

Why confirmation bias is dangerous

Confirmation bias is especially dangerous because it prevents rational updating of beliefs in response to new evidence, undermining the very process by which good judgment improves over time. It runs directly counter to the Bayesian thinking examined in Unit 5, which counsels updating one's beliefs in proportion to the strength of new evidence: confirmation bias instead causes us to overweight evidence that fits our beliefs and underweight evidence that does not, so our views become entrenched rather than responsive to reality. This leads to overconfidence, examined in the next lesson, and to a dangerous blindness to risks and warning signs, as the investor systematically filters out the very information that might reveal a mistake. Confirmation bias is, in effect, a mechanism for fooling oneself, the cardinal sin that Units 5 and 8 warned against.

Defending against both biases

Combating these biases requires deliberate, effortful objectivity. The defense against anchoring is to focus on current fundamentals and forward-looking value, as Unit 3 taught, rather than on arbitrary reference points like the purchase price or a previous high, deliberately asking what an investment is worth now based on its actual prospects, independent of where its price has been. The defense against confirmation bias is more demanding still: to actively seek out disconfirming evidence, deliberately looking for reasons you might be wrong rather than reasons you are right. This includes steelmanning the opposing view, constructing the strongest possible case against your position, specifying in advance what evidence would change your mind, and seeking out diverse perspectives rather than an echo chamber. The honest framing is that anchoring and confirmation bias are pervasive and subtle, operating beneath conscious awareness, so the antidote is not simply intending to be objective but actively and effortfully seeking what you do not want to hear, deliberately challenging your own reference points and conclusions. This discipline of actively pursuing disconfirming evidence and questioning one's anchors is among the most valuable habits an investor can build, and it connects directly to the intellectual honesty that the entire curriculum has held up as essential, the commitment to not fooling yourself.