Stock Market · Mind over Markets

Sunk cost fallacy

Sunk cost fallacy is the tendency to continue investing in a losing endeavor because of what you've already invested. Time, money, or emotion. In investing, it traps people in declining positions for years.

The pure logic

Money you've already spent is GONE. It cannot be recovered by holding longer. The only relevant question is: 'Given my current situation, what's the best move FORWARD?'

Yet the brain doesn't work this way. It keeps adding effort to recover what's already lost.

Classic investing examples

1. Holding a stock down 60%: 'I've already lost ₹3 lakh. I have to wait for it to come back.'

2. Continuing to fund a failing trading strategy: 'I spent 2 years learning this. Can't quit now.'

3. Sticking with a bad mutual fund: 'I've been in this for 8 years. Switching means I wasted those years.'

4. Doubling down on a thesis that's been disproved by new information

> The past is sunk. The future is what you can affect. Make every decision based on forward expected value.

The reframe

Imagine you DIDN'T own the current position. Looking at the stock/fund/strategy with fresh eyes, would you buy it today at its current price with what you know now?

If yes: hold (and possibly buy more).

If no: sell. Your historical investment in it is irrelevant.

Why this is so hard

Selling at a loss feels like admitting failure. Holding feels like 'maybe I was right', even when all evidence says otherwise.

The brain treats financial decisions emotionally even when they're purely mathematical.

Famous corporate example

Concorde supersonic jet: continued production for years after it was clear it would lose billions. Decision-makers couldn't abandon what they'd already spent. Total losses far exceeded the cost of stopping earlier.

Defeating sunk cost

1. Re-evaluate every position as if you didn't own it

2. Pre-define 'kill criteria'. Specific evidence that would make you sell

3. Track decisions by forward expected value, not historical investment

4. Accept that some losses are unrecoverable and the best response is to redeploy capital elsewhere

The poker frame

Professional poker players are taught: when you've made a bad call, FOLD. The chips you've put in the pot don't earn you the right to win. They're already gone. Same principle in investing.

Takeaway. Sunk cost fallacy traps investors in losing positions because of what they've already invested. The past is gone. Only forward expected value matters. Pre-define kill criteria. Re-evaluate every position as if buying fresh today.