Anchoring Effect: Bias In Financial Planning

We, as humans, bargain on MRPs, compare EMIs, and set budgets for household expenses. But the “first number” we see - an MRP, mutual fund’s NAV, stock's 52 week high/low, a first insurance premium quote — often becomes our mental anchor. In financial planning, that anchor can quietly force you take wrong decisions!

What is the anchoring effect?

Anchoring is a behavioral bias where we rely too heavily on the first number we see. In money decisions, that could be:

• The MRP on a gadget influencing what feels like a “deal”

• A stock’s 52-week high framing what feels “cheap”

• A first insurance premium anchoring what feels “affordable”

Once anchored, we compare everything else to it - even if that anchor is irrelevant to our goals.

Before we dive in, here are quick real-life anchors all of us face (illustrative):

• Mutual funds NFOs: Choosing a new fund offer (NFO) at ₹10 thinking it’s cheaper than an existing fund at ₹120. NAV is just price per unit, not “cheap” or “expensive.”

• Stock Market: Waiting for a stock to “come back to my buy price,” or holding cash for an exchange rate to return to an old level - classic anchoring.

• Last year’s returns: Favoring a scheme only because it delivered 30% in the last FY, ignoring risk, consistency, and suitability.

• Term insurance: Thinking that ₹1 Cr insurance cover is a good fit for yourself, because it's heavily marketed everywhere and is a feel-good first number.

• Health insurance: Anchoring to last year’s lower premium and skipping needed features like no-room-rent-cap or restore benefits.

  
  

More Anchors quietly show up in Financial Planning

• Investments

  • SIP amount copy-paste: “My friend does ₹5,000 SIP” is an anchor. Your goals may demand ₹7,500 or ₹12,000. ₹5K, ₹10K, ₹15K etc. are all anchors.

  • “52-week high/low” fixation: A stock at ₹900 feels cheap vs its ₹1,200 high, but the business value and your asset allocation matter more.

  • Last year’s top performers: “Past performance is not indicative of future results.” SEBI/AMFI mandate this for a reason.

  • ₹1 Cr feels like 'right' retirement corpus goal, just because a friend said so.

  • Legacy asset anchors: “I bought this property at ₹Y; won’t sell below ₹Z.” Consider opportunity cost, taxation, and portfolio fit instead.

• Insurance

  • Term cover by premium: First quote anchors perception. Instead, compute cover via Human Life Value (HLV). E.g., 10–15x annual income, adjusted for loans and goals, then compare features.

  • Health insurance: Don’t anchor to last year’s premium; medical inflation, capping, and room rent rules can change outcomes drastically at claim time.

    
    

How to Spot & Beat the Anchor?

Think of cricket: you don’t pick a player only by the last match score. You look at conditions, role, consistency, and team balance. Money decisions deserve the same method.

• Step 1: Reject & Question the First Number you hear

• Step 2: Name the Anchor

  • “I’m fixating on last year’s return.”

  • “I’m comparing everything to a ₹10 NFO.”

  • “I want my premium under ₹10,000, even if cover is low.”

• Step 3: Swap to decision criteria

  • Investments: Goal timeline, Risks, Asset Allocation, Consistency

  • Insurance: HLV-based sum assured, claim process, waiting periods, exclusions, room rent and sub-limits, solvency/insurer track record.

• Step 4: Compare at least three options

  • Side-by-side on the same criteria. No single number dominates.

    
    

Conclusion

Anchors are everywhere and we cannot ignore them - from investments to insurance, from planning to execution. The way out is simple: define criteria, compare methodically, and let your goals, not the first number, drive the decision. A well-planned and well-thought approach helps you win.

Happy Investing!