Anchoring Bias: How the First Number You Hear Skews Financial Decisions

Doctor dragged down by anchoring bias

Have you ever noticed how the first number you hear tends to shape everything that comes after it—whether it’s the price of a house, a job offer, or even your retirement target? That’s not just a quirk of human thinking; it’s a well-documented psychological phenomenon called anchoring bias. It affects our financial decisions more than we realize—quietly influencing what we think something should be worth, what we feel we deserve to earn, or how much we need to save. Here are a few times I’ve experienced anchoring in action—and how you might be, too.

Example #1: Real estate purchases

I bought my first house a year after I became an attending physician back in 1999 for $210,000. That was back when you could get a decent 3-bedroom house for that price.  (The wisdom of buying a house that soon after getting my first job is questionable given that, like many physicians, I changed jobs less than two years later and moved out of state.  I should have just continued renting until I was sure that the situation was right for my family).  We ended up doing some upgrades in that first year: a new fence, a laminate wood floor, new paint, and a concrete driveway.  That cost us some money, though I did a lot of the work myself. 

When I went to sell the house a year and a half later, I had a clear price target in my head.  It was $210,000 plus the expected cost of the upgrades (if a contractor had done it) plus 5% per year return.  I was ready to list it for around $245,000.  So, I engaged a real estate agent to put the house on the market and recoup some of those costs and "sweat" equity.  I was sorely disappointed when he suggested we list it for $220,000.  “But what about all the work I’ve done? . . . that’s at least $25,000 in upgrades,” I argued.  The agent simply said, “All of that is irrelevant.  It only matters what a buyer is willing to pay for this house, and the market right now says $220k.” 

That was my first lesson in anchoring bias. 

Anchoring is a cognitive bias where we place too much importance on the first piece of information we receive when making decisions. That initial number—or "anchor"—sticks in our minds and skews how we evaluate everything that comes after it, even if it's arbitrary or irrelevant.  It was first described by Daniel Kahneman and Amos Tversky, pioneers of behavioral economics. And in the financial world, it shows up everywhere.

Back to my housing example, my anchor was $210,000 because that is what I paid for the house.  I might have overpaid for it, who knows, but that number is what I felt it was worth when I bought it.  And since I added money to that figure with upgrades and factored in a year and half of appreciation, my estimation for what it was worth was much higher than reality.  We ended up selling the house for slightly less than what the real estate agent expected to sell it for, and I lost money on the move, especially when factoring in the transaction costs.   

Example #2: Salary

The second lesson was related to my salary at my second job.  I knew what I was getting paid as a new partner at my first job, and my second job paid less.  I took it because it was the only job available in the area where we wanted to live, close to our extended family.  But it still always felt like I was being underpaid.  Never mind that it was in a different state with a different cost of living and at a smaller community hospital instead of a Level 1 trauma center.  Again, my mind was anchored on my first salary. 

Example #3: Investments

A final example happens repeatedly with stock purchases that I have made.  If I purchased something at $100 per share and it dropped over the next year to $75 per share and I decided that I didn’t want to own that company any more, my anchoring bias and my loss aversion would tell me to wait at least until the stock price got back up to $100 to sell it--because that is what I paid for it.  The fact that I may have overpaid for it at $100 is irrelevant in my mind.  That is what the stock was “worth” to me.

On the other side, if the stock price increased to $150, it felt great momentarily. But if it subsequently dropped to $125, I was again disappointed, even though I had made $25 per share on the investment.  Why? Because my new anchor of what the stock was worth had shifted to $150.   

How about you?

Ever toured a home and thought, “It’s listed for $1.5 million, but maybe I can get it for $1.4”?  (Perhaps the house isn’t even worth $1.4, but since you are anchored on $1.5, it feels like a bargain.)

Or found yourself thinking, “I should be earning at least $400,000—after all, that’s what my colleague makes”?  (But maybe your colleague’s job situation is completely different than yours or might even be getting underpaid. If you anchor on that number, it might affect your negotiation strategy or job satisfaction.)

What about your “retirement number”? If you read somewhere that you need $5 million to retire comfortably, you might anchor in on that number even if it is not close to accurate given your individual circumstances.  How much you need to retire depends on a lot of variables, chief of which is how much you intend to spend each year in retirement.  And there are all kinds of lifestyle decisions that factor into that.  What might be right for someone else might be completely off for you. Anchoring on the wrong number can drive flawed savings goals, inappropriate risk taking (or being overly conservative), and unnecessary stress.

These are real-life examples of how anchoring bias can hurt you: overpaying for homes or investments, underselling yourself when negotiating your salary based on outdated or inaccurate numbers, saving too much or too little for retirement, sticking with bad investments.

But sometimes anchoring can work in your favor if it gives you some guardrails, or boundaries, on spending. Think, hotel rooms, airplane tickets, etc.  You just need to be sure that you are choosing the right numbers when you do so.

Tips to Combat Anchoring Bias

• Do your own research. Look at ranges, not single data points. Use tools like Doximity compensation reports, home comparables, or financial planning calculators.

• Delay judgment. Don’t decide based on the first number you hear. Consider context, quality, and multiple inputs.

• Ask “Why?” Why is this number being presented to me? Is it for my benefit—or someone else’s?

• Use better anchors. If you're going to anchor, make it intentional. Base your decisions on well-researched and relevant benchmarks.

Final Thoughts: Know Your Anchors

As a physician, you're trained to make decisions using data, evidence, and clinical judgment. But when it comes to money, your brain—just like everyone else's—can fall into subtle traps like anchoring.

The key isn’t to eliminate bias completely. It’s to recognize it, question it, and make more mindful financial decisions.

And next time someone throws out a number, ask yourself: “Is that the truth—or just an anchor?”

Considering using a financial advisor? Contact me at bryan@targetedwealthsolutions.com for a free exploratory zoom call.