Anchoring: why the purchase price keeps influencing decisions

The purchase price becomes the reference point against which every later move is judged. For decisions it is useless.

Why it is useless

The market does not know what you paid and has no intention of returning there. A security's future return depends on its current price and prospects, not on your history.

The question of holding or selling is answered identically whether the position is up or down.

Other anchors

The all-time high: "it used to cost more, so it is cheap". A past price is not a valuation — Price and value: how a market quote differs from what a business is worth.

Round numbers: levels that attract attention only because they are easy to remember.

The first estimate you saw: whichever forecast came first sets the range within which every later one seems reasonable.

Where it costs money

In averaging down: adding "to bring the average price down" is a decision built entirely on an anchor. Your average price is your bookkeeping, not a property of the security.

In setting targets: "I will sell when it returns to my purchase price" is an expectation that may never arrive.

What helps

Assessing a position as though you had just opened it — regularly and on schedule: Rebalancing: returning to the target weights.

Related: Loss aversion: why a loss hurts more than an equal gain pleases.