sunk cost fallacy
The tendency to continue investing in something because of past investments already made, even when the rational decision would be to cut losses and move on.
Example
“Despite the stock being down 80%, she held it due to sunk cost fallacy — refusing to take the loss on money already invested.”
Memory Tip
SUNK COST fallacy = past money is SUNK (gone). Don't let it drive future decisions.
Why It Matters
Understanding sunk cost fallacy is crucial because it helps you make better financial decisions by focusing on future outcomes rather than past losses. Many people waste significant money by throwing good money after bad, which can derail long-term wealth building and investment returns.
Common Misconception
People often think that sunk cost fallacy only applies to large investments, but it actually affects everyday decisions like finishing a bad meal you paid for or keeping a subscription you do not use. The size of the initial investment does not matter; what matters is recognizing that past money is gone regardless of future choices.
In Practice
Imagine you invested 5000 dollars in a stock that has dropped to 2000 dollars. If you hold it hoping to recover your losses just to avoid admitting the loss, you are falling victim to this fallacy. The rational decision is to evaluate whether the stock will likely recover based on its current fundamentals, not because you have already lost 3000 dollars that cannot be recovered.
Etymology
SUNK COST (money already spent, unrecoverable) FALLACY (false reasoning). Continuing because of SUNK COSTS is a FALLACY.
Common Misspellings
Start investing with no commission trades
Related Terms
More in investing
Other investing terms you should know
See Also
Need financial definitions?
Clear definitions for 2,500+ finance, insurance, and investing terms.