The Anchoring Trap
How Reference Points Distort Investment Decisions
Perseus Capital Research
2.0–2.5×
Loss Aversion Coefficient
Pain of $1 loss vs. $1 gain
1.5×
Disposition Effect
More likely to sell winners than losers
7:1
Round Number Clustering
Limit orders at round numbers
34%
Mag 7 S&P Weight
Up from 12.5% in 2016
Executive Summary
The hidden force distorting your portfolio
Core Thesis
Anchoring bias — the tendency to rely excessively on initial reference points when making decisions — is among the most pervasive and costly cognitive errors in investing. Rooted in Kahneman and Tversky’s foundational prospect theory and refined by decades of subsequent research, anchoring has been shown to systematically distort capital allocation across public equities, fixed income, real estate, and private markets. This note examines how anchoring to purchase prices, 52-week highs, analyst targets, and round numbers creates predictable mispricings. We illustrate these dynamics with five detailed post-COVID case studies and present an actionable framework for disciplined value investors to identify and exploit anchor-driven opportunities.
Theoretical Basis
5 decades of behavioral finance research
5 Case Studies
Real-world post-COVID anchoring traps
Actionable Framework
5-step process to exploit mispricings
Theoretical Foundations
From prospect theory to behavioral asset pricing
The study of anchoring in financial markets sits at the intersection of three major intellectual traditions: Kahneman and Tversky’s prospect theory (1979), which demonstrated that individuals evaluate outcomes relative to reference points rather than in absolute terms; Thaler’s behavioral economics framework on mental accounting and bounded rationality; and Shiller’s narrative economics (2019), which shows how stories and salient numbers propagate through markets and shape collective behavior.
In Kahneman and Tversky’s landmark 1974 experiment, subjects who spun a rigged wheel landing on 65 guessed African nations in the UN at a median of 45%, while those who saw 10 guessed only 25%. Their subsequent development of prospect theory formalized a critical insight: losses loom larger than gains relative to a reference point.
Modern behavioral asset pricing models have formalized these insights. Barberis, Huang, and Santos (2001) developed a consumption-based model incorporating prospect theory preferences that explains the equity premium puzzle, excess volatility, and predictability of stock returns. Anchoring operates through System 1 (fast, automatic thinking) and contaminates System 2 (deliberate, analytical thinking) because System 2 uses the anchor as a starting point for its adjustments — adjustments that are systematically insufficient.
Connecting the Theoretical Threads
Prospect Theory (Kahneman & Tversky, 1979)
Outcomes evaluated relative to reference points; loss aversion amplifies anchoring effects.
Mental Accounting (Thaler, 1985, 1999)
Investors compartmentalize positions into separate mental accounts, each with its own reference point.
Limits to Arbitrage (Shleifer & Vishny, 1997)
Anchoring-driven mispricings persist because arbitrageurs face capital constraints and career risk.
Narrative Economics (Shiller, 2019)
Salient numbers become viral anchors that propagate through media and social networks.
Inelastic Markets (Gabaix & Koijen, 2022)
Passive index anchoring amplifies price dislocations when active price discovery is weak.
The Four Primary Anchors
How markets get systematically trapped
The Disposition Effect
Purchase Price Anchoring
1.5×
More likely to sell winners
Perhaps the most damaging anchor is the investor’s own cost basis. Odean’s (1998) seminal analysis found investors are 1.5× more likely to sell winners than losers. Frazzini (2006) extended this to institutional investors, showing professional fund managers also exhibit the disposition effect, with stocks they sold prematurely outperforming those they held by approximately 4% over the following year.
Historical Price Momentum
52-Week High/Low Anchor
52W
High predicts returns
George and Hwang (2004) documented that stocks near their 52-week high exhibit muted momentum because traders anchor to the historical price. Li and Yu (2012) extended this, showing the ratio of a market index to its 52-week high predicts future returns.
Earnings Estimate Anchoring
Analyst Price Targets
90d
Stale targets = opportunity
Bradshaw, Brown, and Huang (2013) documented that analyst targets cluster around round numbers, with the revision process creating “anchor creep” — targets that systematically lag reality in both directions. Abarbanell and Bernard’s (1992) work showed analysts insufficiently adjust from prior quarters, producing the robust post-earnings-announcement drift (PEAD) anomaly.
Liquidity Discontinuities
Round Number & Index-Level Anchoring
7:1
Order clustering ratio
Bhattacharya, Holden, and Jacobsen (2012) found limit orders cluster at round numbers by a factor of 7-to-1, creating genuine liquidity discontinuities. When attention is scarce, salient round numbers capture disproportionate cognitive resources. In the social media era, round numbers become viral focal points.
Post-COVID Case Studies
Five anchoring traps in real time
The period from 2020 through early 2026 has provided an extraordinary natural laboratory for observing anchoring bias at scale.
PTON
Peak: $163 (Dec 2020)
~$4.40
97%
ZM
Peak: $559 (Oct 2020)
~$80
86%
Peloton’s trajectory is a textbook study in dual anchoring. Investors who bought during the pandemic anchored to the $163 peak, refusing to sell as the stock declined through $100, $50, and $30 — each level becoming a new “get back to even” target.
Meanwhile, value-oriented investors who entered between $20–40 in 2022–2023 anchored to what appeared to be a bargain relative to the peak, without recognizing that the fundamental business was impaired: revenue peaked at $4 billion in fiscal 2021 and has declined every year since.
Several prominent institutional investors took large new positions in late 2021 as the stock fell from its peak — anchoring to the pandemic-era business trajectory rather than reassessing from first principles.
Actionable Insight
When a company’s revenue trajectory has been distorted by an exogenous shock, anchor your valuation to the pre-shock trend line, not the spike. Ask: “What would this business look like if the shock had never occurred?”
Summary
Post-COVID anchoring events and investment implications
Scroll for full table
| Anchoring Event | Exploitable Signal |
|---|---|
| Peloton ($163 → $4) | DCF off pre-pandemic baseline |
| Zoom ($559 → $80) | Normalize for demand pull-forward |
| SVB Collapse | Duration mismatch analysis |
| Office CRE (−37%) | Cap rate repricing to current cost of capital |
| Mag 7 Concentration | Equal-weight vs. cap-weight spread |
| 3% Mortgage Lock-in | New construction premium |
| Meme Stocks (2021) | Avoid narrative-driven anchors |
| Crypto ($69K → $16K) | On-chain fundamentals vs. price anchor |
Actionable Framework
Five steps to exploit anchor-driven mispricings
Drawing from both the academic literature and the post-COVID case studies, we present a systematic investment process.
The “Blind Valuation” Protocol
Before consulting any market price, trading range, or analyst target, build your own intrinsic value estimate from first principles. For equities, construct a DCF using your own revenue and margin assumptions. For real estate, calculate stabilized NOI at current market rents. For fixed income, assess credit quality and duration risk independently.
Damodaran (2012), Greenwald et al. (2020)
The “Regime Check” Audit
Quarterly, audit every position for regime-dependent assumptions. Ask: “What interest rate, growth rate, cap rate, or multiple is this position implicitly priced for? Has that assumption been overtaken by reality?” SVB’s failure, the office CRE collapse, and the pandemic darling implosion all stemmed from positions anchored to a regime that had already changed.
Howard Marks: “What’s priced in?”
The Zero-Based Position Review
For every existing holding, ask: “If I had no position today, would I buy this at the current price with the current information?” If no, sell — regardless of your cost basis. Implement tax-loss harvesting as a positive incentive to overcome the disposition effect.
Thaler’s mental accounting research
The Contrarian Anchor Screen
Systematically screen for assets where the market’s anchor is demonstrably stale. Signals include: stocks trading >40% below a 52-week high held for >6 months; analyst targets not revised in >90 days during material fundamental change; real estate with appraised values >30% above recent comparables.
George & Hwang effect
Pre-Commitment & Process Documentation
Before initiating any position, document your thesis, intrinsic value estimate, buy price, sell price, and exit conditions. Commit to reviewing at predetermined intervals. This pre-commitment mechanism reduces the influence of anchoring at the moment of decision.
Thaler & Sunstein (2008), Greenblatt (2006)
Current Opportunities
Applying the framework to today's markets
Using our five-step framework, we identify several categories of anchor-driven opportunities that exist as of early 2026.
Office CRE (Select Markets)
Acquire at 8–10% cap on stabilized NOISmall/Mid-Cap Equities
Overweight equal-weight S&P vs. cap-weightFixed Income Duration
Extend duration on rate cutsHospitality Assets
Selective hotel acquisitionsValue vs. Growth Spread
Tilt toward quality value factorsEuropean Equities
Increase international allocationEach of these opportunities shares a common structure: the market's prevailing anchor is creating a systematic deviation between price and intrinsic value, and that deviation is large enough to compensate for the risk of early entry.
Institutional Applications
The limits to debiasing
Benchmark Anchoring & Career Risk
Cremers and Petajisto’s (2009) study of Active Share found the majority of “active” funds hug their benchmarks, paying active fees for passive exposure — a direct consequence of benchmark anchoring driven by career risk.
Volatility Regime Anchoring
Anchoring to compressed-volatility environments leads to systematic underestimation of tail risk — proved catastrophic in 2008, March 2020, and the 2022 rate shock. Mandelbrot and Hudson’s (2004) work showed financial returns exhibit fat tails that standard Gaussian models systematically underestimate.
Limits to Arbitrage
Shleifer and Vishny’s (1997) work demonstrated that even when sophisticated investors identify mispricings, capital constraints and career concerns prevent full exploitation.
Key Takeaway
The most profitable response to anchoring is not to eliminate it — which is neurologically impossible — but to build systematic processes that identify when it is influencing decisions and redirect analysis to first-principles valuation.
“The biggest investing errors come not from factors that are informational or analytical, but from those that are psychological.”
— Howard Marks, The Most Important Thing (2011)
Conclusion
The most valuable edge in modern markets
The post-COVID era has provided an extraordinary demonstration of anchoring’s power to create and destroy wealth at scale. From pandemic darlings that anchored investors to unsustainable revenue trajectories, to SVB’s catastrophic anchoring to zero interest rates, to the commercial office market’s paralysis between pre-pandemic valuations and post-pandemic reality, the pattern is consistent: when reference points become divorced from fundamentals, patient investors who can detach from the anchor and value assets from first principles are rewarded.
Five decades of theoretical and empirical work confirm that reference points systematically distort capital allocation across every asset class and every level of investor sophistication. The mispricings they create are not random; they are predictable, repeatable, and exploitable by those with the discipline to build anchor-resistant investment processes.
In a market increasingly dominated by passive flows, algorithmic momentum, and behavioral herding, the ability to think independently from prevailing anchors may be the most valuable edge a fundamental investor can possess.
References
Academic and practitioner sources
Disclaimer: This material is prepared for informational purposes only and does not constitute investment advice, a recommendation, or an offer to buy or sell any security. Perseus is not a registered investment adviser. All investments involve risk, including the possible loss of principal. Past performance is not indicative of future results. Please consult a qualified financial professional before making investment decisions. View full disclosures.
© 2026 Perseus Capital LLC. All rights reserved.
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