The Anchor Drag: Why You Won't Sell the Stock That Dropped

I used to work at a tech company that went public. IPO day was electric: people were checking the stock price every five minutes, doing mental math on their options, texting screenshots to their families. The stock opened strong. At the moment, we all loved our online statements.

Then came the lockup period. Six months where employees couldn't touch their shares. By the time we could finally sell, the stock was down 40% from the IPO price.

Most people held.

"It'll bounce back," they said. These weren't naive people; they were product marketers, engineers, finance heads. They were people who sat in the strategy meetings and knew exactly what the company's challenges were. But they couldn't bring themselves to sell at a loss.

The stock dropped another 30% over the next year.

I watched smart, financially savvy colleagues ride it all the way down, anchored to a price that existed for a fleeting moment in time. The IPO price became the "real" value in their minds, and everything after that was just temporary noise. It wasn't. The $20 price was real. The $75 price was history.

That's anchoring bias and it's one of the most expensive psychological traps in investing.

What Anchoring Bias Actually Is

Anchoring is our tendency to rely too heavily on the first piece of information we encounter when making decisions. In investing, that first piece of information is almost always the price you paid.

You buy a stock at $100. It drops to $50. Rationally, you know the $50 is the current reality and that's what the market is willing to pay today. But your brain keeps returning to $100. That was the "real" price. This $50 situation is temporary. You'll wait for it to recover.

Except sometimes it doesn't recover. And even when it does, you've tied up capital in an underperforming asset for months or years, missing other opportunities.

The anchor doesn't just affect individual stocks. I see it with real estate ("But we paid $800k for this house. We can't sell it for $650k") and retirement accounts ("I'm not selling until my 401(k) gets back to where it was").

The problem isn't that you remember what you paid. The problem is that what you paid has zero bearing on what something is worth today. The market doesn't care about your cost basis. 

Why the IPO Anchor Is So Powerful

Employee stock is particularly vulnerable to anchoring because the IPO price carries so much emotional weight. It's not just a number—it's validation. It's public proof that your company matters, that your work had value, that you made the right bet joining this startup.

When the stock drops below the IPO price, it feels like that validation is being taken away. Selling at a loss feels like admitting you were wrong, or that the company failed, or that you're giving up.

But here's what actually happened at my old company: the IPO price was set by bankers optimizing for a successful offering. It was marketing as much as valuation. The stock traded on emotion and hype for a few weeks, then the market sobered up and repriced it based on fundamentals. The "real" price was probably somewhere between the IPO pop and the eventual floor—but definitely not the IPO price itself.

The employees who sold early—even at a loss relative to IPO—reinvested that money into diversified portfolios. The ones who held were making two expensive mistakes:

1. Concentration risk: They had too much of their net worth in a single company—often the same company paying their salary. That's doubling down on risk, not managing it.

2. Opportunity cost: The money stuck in that declining stock missed years of compounding in other investments. Even if the stock eventually recovered, they'd lost time they couldn't get back.

   
   

How to Break Free from the Anchor

The most useful question I've found for cutting through anchoring bias is this:

If I sold this asset right now and had cash in hand, would I immediately buy it back?

If the answer is no, then the only rational move is to sell and reinvest it in something that aligns to your broader financial strategy.

This is hard. I'm not pretending it's easy. Selling at a loss feels like failure, even when it's the smart move. That's why having someone outside your own head—a financial advisor, a trusted friend, a set of rules you committed to in advance—can make all the difference.

When clients come to me stuck on a position, I don't tell them they're being irrational. I just ask questions: What's your thesis for holding this? Has anything changed about the company, or just the price? If you didn't already own this, would you buy it today?

Usually, they know the answer. They just need permission to act on it.

Sonoma Mountain Financial LLC ("Sonoma") is a registered investment advisor. Advisory services are only offered to clients or prospective clients where Sonoma and its representatives are properly licensed or exempt from licensure.

Diversification does not ensure a profit or guarantee against loss. This information is general in nature and should not be considered tax advice. Investors should consult with a qualified tax consultant as to their particular situation.