Anchoring Bias

Anchoring bias was identified and documented by Kahneman and Tversky in their 1974 paper on heuristics and biases. The original experiments showed that people's numerical estimates are strongly influenced by an arbitrary initial number (the anchor), even when the anchor is known to be random and irrelevant. For example, subjects shown a random number before estimating the population of an African country gave estimates biased toward that number.

In financial markets, anchoring typically involves attaching decision-making significance to price levels (a previous high or low, a round number, an analyst's price target, or the price you paid) that the market may no longer care about. The anchor becomes a reference point for all subsequent decisions, distorting both analysis and risk management.

In binary options, anchoring bias most commonly appears in two forms. First, entry price anchoring: The fact that EUR/USD was at 1.2000 yesterday is often irrelevant to whether it will rise in the next 5 minutes today — but traders anchor to that level and treat it as a magnet or target. Momentum, news flow, and current structure matter far more than where the asset was 24 hours ago in a 5-minute expiry trade.

Second, daily P&L anchoring: If you started the session at breakeven and lost $50, you may feel compelled to keep trading to "get back to zero" — anchoring decisions to a reference point (breakeven) that has no bearing on the next trade's probability. The next trade's win probability is identical whether you're up $100 or down $100 on the session.

Binary options traders also commonly anchor to the price at which they entered a different trade on the same asset — which is entirely irrelevant information for a new, independent contract.