You walk into a boutique, eyeing a leather jacket. The tag says $1,200 — more than you planned to spend. But then you see a bright-red sale sticker: Now only $699. Suddenly, the jacket seems like a bargain. Did the jacket’s quality magically improve between glances? Of course not. What changed was your perception, and it was hijacked by a psychological quirk known as anchoring bias.
Anchoring bias isn’t just a parlor trick of the retail world — it’s a pervasive mental shortcut that can distort decisions in investing, real estate, salary negotiations, and even everyday purchases. And in the high-stakes world of valuation, where numbers drive million-dollar choices, failing to recognize this bias can lead to costly traps.
What Anchoring Bias Really Is
At its core, anchoring bias is our tendency to rely too heavily on the first piece of information — the anchor — when making decisions. Psychologists Amos Tversky and Daniel Kahneman famously demonstrated this in the 1970s with experiments where participants guessed numbers after spinning a rigged wheel. Even though the wheel’s result was random and unrelated, guesses were consistently swayed toward the number it landed on.
In the valuation world, the “wheel” can be a seller’s asking price, an analyst’s initial projection, or last year’s performance figures. Once that first number lodges in our minds, it shapes our thinking, often without us realizing it.
Why Valuations Are Especially Vulnerable
Valuation is inherently subjective. Whether you’re pricing a company, a property, or a rare piece of art, the final figure is part math, part storytelling. Anchors seep in easily because they offer a reference point in an otherwise uncertain landscape.
Take the case of startups. An early funding round might value a young tech company at $50 million based on hype, projections, or sheer optimism. Years later, when the company seeks more investment, that initial valuation becomes a benchmark, even if market conditions or performance no longer justify it. Investors and founders alike may hesitate to adjust downward, clinging to the anchor instead of recalibrating based on present realities.
The Illusion of Bargains and Premiums
Anchoring bias doesn’t just make overpriced things look reasonable — it can also make underpriced things seem suspicious. In real estate, a home listed at $900,000 may feel “cheap” if nearby properties are listed at $1.2 million, even if $900,000 is objectively more than the house is worth. Conversely, a stock trading well below its 52-week high can feel like a bargain, even if the previous peak was inflated by market mania.
This is where the danger lies: our brain treats the anchor as a neutral reference point, but it’s often anything but neutral. It could be arbitrary, manipulated, or outdated. And in competitive bidding situations, like auctions, anchors can turn into psychological weapons.
How Sellers and Negotiators Use Anchors Against You
Marketers, negotiators, and salespeople understand anchoring bias intuitively — even if they’ve never read a psychology paper. Setting an initial high price creates a frame for comparison that makes later concessions seem generous. This is why you see luxury goods “discounted” from eye-watering prices or why real estate agents might list slightly above the target sale value.
In negotiations, whoever makes the first offer often gains a subtle but powerful advantage. If you’re selling your services and propose $100 per hour, the discussion will likely orbit around that number, even if the market rate is $80. That initial figure becomes the gravitational center of the conversation.
The Role of Overconfidence in Anchoring
Part of what makes anchoring dangerous is our overconfidence in our ability to adjust away from it. We think, Sure, I heard $1,000, but I won’t let that influence me. Yet research shows our adjustments are usually insufficient — we move away from the anchor, but not far enough.
This happens because anchors affect not just conscious reasoning but subconscious perception. Once a figure is planted, our brain selectively searches for evidence to support it, a phenomenon known as confirmation bias. Together, anchoring and confirmation bias form a cognitive one-two punch that can knock objectivity out cold.
Avoiding Anchoring Traps: Practical Strategies
While anchoring bias is deeply rooted in human thinking, it’s not unbeatable. Here are some approaches that seasoned investors, analysts, and negotiators use to counter it:
- Do Your Homework Before Seeing a Number
Entering a negotiation or valuation with your own independently researched figure weakens the anchor’s pull. If you’ve already established a justified price range for a property before hearing the seller’s asking price, you’re less likely to be swayed. - Seek Multiple Independent Opinions
Anchors lose power when they compete. By consulting different analysts or appraisers, you dilute the influence of any single anchor. - Question the Source and Context of the Anchor
Is the asking price based on market data, or is it an inflated figure designed for negotiation? Has the “last valuation” been adjusted for changes in the market? Asking these questions forces critical thinking. - Use Counter-Anchoring in Negotiations
If someone opens with a high price, you can respond with a dramatically lower counter-offer to shift the frame. This tactic can neutralize the original anchor or at least create a new midpoint. - Create Valuation Models Without External Inputs First
In investment analysis, building your own model before looking at market prices can reveal how far your independent assessment diverges from prevailing anchors.
Anchoring in the Age of Big Data
You might think that the rise of algorithmic pricing and big data would reduce the influence of anchoring. In some ways, it does — data-driven models can sidestep human biases. But the anchors still creep in, often at the stage of data selection or model calibration. If the algorithm’s parameters are based on historical prices or market norms, it inherits those anchors, even if they’re flawed.
Worse, when algorithms set prices (as in ride-sharing surge rates or dynamic airline ticketing), they can strategically create anchors to nudge behavior. If you’ve ever booked a flight because “the fare just dropped from $650 to $520,” you’ve seen digital anchoring at work.
When Anchors Become Self-Fulfilling
Sometimes, anchors persist because they get reinforced by the very market they influence. If enough people believe a stock is worth $100 because that’s where it’s been trading, they’ll keep buying and selling around that level, creating a feedback loop. This phenomenon can prop up bubbles or slow the correction of overvalued assets.
In housing markets, for instance, sellers may hold firm to last year’s prices, refusing to drop below an anchor even as demand cools. Buyers, expecting a return to the “normal” price, may wait, which freezes transactions and delays price adjustments.
The Personal Side of Anchoring
Anchoring isn’t just for markets — it’s personal. If you’ve ever hesitated to take a lower-paying but fulfilling job because you were “anchored” to your current salary, you’ve experienced it firsthand. Anchors can tether us to past expectations, making us resistant to opportunities that don’t fit the original number in our heads.
The same happens in everyday spending. A person accustomed to paying $4 for coffee may balk at $6 — even if the pricier cup is objectively better — because their internal anchor defines what “coffee should cost.”
Learning to Let Go of the First Number
Avoiding anchoring bias isn’t about ignoring numbers — it’s about resisting their undue influence. It requires discipline, self-awareness, and sometimes the humility to admit that the first figure you heard, or even the one you came up with yourself, might be wrong.
In valuations, as in life, the first number is rarely the final truth. The more we challenge anchors, the closer we get to making decisions based on reality rather than reflex.
Next time you find yourself swayed by that “before” price on a shopping tag or clinging to last quarter’s valuation in an investment pitch, pause and ask: Am I seeing the value, or just the anchor?