Anchoring is leaning on the first number you saw when judging what comes next. Amos Tversky and Daniel Kahneman showed in 1974 that even an obviously arbitrary number shifts people's estimates. For an investor the strongest anchor is the price you paid: "I'll sell when it's back to what I paid" treats that number as meaningful to the share, when nobody else knows it.
It feeds the disposition effect, named by Hersh Shefrin and Meir Statman in 1985: selling winners too early and holding losers too long. Terrance Odean's 1998 study of 10,000 US brokerage accounts found investors far readier to sell a gain than a loss, and the winners they sold went on to beat the losers they kept by about 3.4 percentage points over the next year. A sunk cost — money already spent that can't be recovered — pulls the same way. The app shows each holding's gain or loss against your average cost because that's your record, not because it says anything about what comes next.
Your buy price matters for your records and your tax. The market never sees it.
SOURCES
- Tversky, A. & Kahneman, D. (1974). Judgment under uncertainty: heuristics and biases. Science, 185(4157), 1124–1131.
- Shefrin, H. & Statman, M. (1985). The disposition to sell winners too early and ride losers too long: theory and evidence. Journal of Finance, 40(3), 777–790.
- Odean, T. (1998). Are investors reluctant to realize their losses? Journal of Finance, 53(5), 1775–1798.
Educational content only. It is not personal financial advice.