Anchoring and Confirmation Bias

Anchoring

Anchoring is the tendency to rely too heavily on an initial piece of information — often a price, whether the purchase price of a stock or a previous high it once reached — when making subsequent decisions, even when that number has little genuine bearing on the investment's actual current value. An investor who bought a stock at 500 rupees, watched it fall to 300, and refuses to sell "until it gets back to what I paid" is anchored to an arbitrary historical price that the market itself has no memory of or obligation to honor.

This is closely related to the sunk cost fallacy — the mistaken belief that money or effort already spent (or lost) should factor into a forward-looking decision, when in reality, only the investment's current prospects from today onward should matter. The 200-rupee loss already incurred is the same whether the stock is sold today or five years from now; what should actually drive the decision is whether the business remains a good investment from the current price forward, entirely independent of the original purchase price.

Confirmation bias

Confirmation bias is the tendency to actively seek out, notice, and give more weight to information that confirms what you already believe, while unconsciously dismissing or downplaying information that contradicts it. An investor convinced a particular stock is a great buy tends to read bullish analyst reports closely while skimming past or rationalizing away bearish ones, reinforcing an existing view rather than genuinely stress-testing it.

Both biases share a common root: a preference for comfort and consistency over accuracy. Countering them requires deliberate effort — actively seeking out the strongest counterarguments to an investment thesis before committing capital, and periodically asking "what would have to be true for me to be wrong here?" rather than only looking for reasons you're right. Investors who build this habit into their process tend to catch deteriorating investment cases earlier, before a manageable loss becomes a much larger one.