Definition
The sunk cost fallacy is the tendency to continue investing in something because of previously invested resources (time, money, effort), regardless of future prospects. In investing, this manifests as holding a losing position because you've 'invested too much to quit' rather than evaluating whether it's still a good investment. Rational decision-making requires ignoring sunk costs and only considering future expected returns. The key question should be: 'Would I buy this today at this price?' not 'How much have I already lost?'
Example
An investor refuses to sell a stock down 50% because 'I've lost too much already.' The rational approach ignores the loss and asks: 'Is this stock worth buying today?' If not, selling and redeploying capital is optimal.
FAQ
What is Sunk Cost Fallacy?
Continuing an investment because of resources already committed rather than future prospects.
Why is Sunk Cost Fallacy important?
Sunk Cost Fallacy helps investors evaluate behavioral finance and make more informed decisions.