Sunk cost fallacy

Continuing to commit money, time or attention to a position because of what you have already put in, rather than because of what it is now worth.

Example

Adding to a losing holding to bring the average price down, without any fresh reason to believe the thesis, simply because selling would make the earlier loss final.

Important

Money already spent is gone in every branch of the decision, so it cannot logically favour one branch. The only live question is what the next dollar buys.

Related terms

• Anchoring — Letting the first number you encounter set the reference point for every judgement that follows, even when that number carries no real information about value.
• Loss aversion — The tendency for a loss of a given size to feel considerably worse than a gain of the same size feels good.
• Disposition effect — The observed pattern of selling investments that have risen while holding on to those that have fallen.

Lessons that explain it

• When to walk away, after you have already spent — By the time walking away is the right answer, you have usually spent money, months and a quantity of public commitment - and all three argue in the same wrong direction. (12 min)
• Would you invest in this round if you had never met the company? — A follow-on decision should be judged as a new investment at today's price and today's evidence. What you already invested is gone either way and should not decide what you do next. (9 min)
• Adding to winners at higher prices often beats rescuing losers at lower ones — Follow-on capital usually has a better expected result in companies with strong evidence, even at higher prices, than in struggling companies at lower prices - though the right choice always depends on the specific evidence. (11 min)
• The mistake library — Losses are cheaper to learn from when they are someone else's. This is the practice of keeping a written record of both kinds so the same error cannot arrive twice wearing a different name. (13 min)
• Overconfidence and anchoring — You know less precisely than you feel you do, and the first number you saw is still quietly steering the decision you think you are making freshly. (9 min)

All 578 terms in the Investing glossary