The Sunk Cost Fallacy
A bus you've already waited 30 minutes for—do you wait a bit more, or walk? If you've ever kept waiting 'because the time you've spent feels wasted,' you've already experienced the sunk cost fallacy.
What is a sunk cost?
A sunk cost is 'money, time, or effort you've already spent and can't get back.' Even if you booked a movie ticket and then found the film boring, the ticket price you already paid won't come back. That's a sunk cost.
A rational judgment should look at only one thing: what you'll gain and lose 'from now on, going forward.' Since costs already spent are gone no matter what you choose, they should not enter the decision.
But the human mind doesn't work that way. Continuing down a path with obvious losses 'because it feels wasteful to have come this far' is exactly the sunk cost fallacy.
Why do we keep feeling it's wasteful? — Loss aversion
According to research by behavioral economists Daniel Kahneman and Amos Tversky, people have a strong tendency toward 'loss aversion.' For the same magnitude, the pain of losing something feels far greater than the joy of gaining it.
Sources vary, but the pain of losing is often described as roughly twice (in the range of about 2 to 2.5 times) the joy of gaining. So 'locking in a loss' is uniquely painful, and to avoid that pain we can't let go of a choice we're already stuck in.
One more thing: the feeling that 'I've spent this much, and if I quit I'll look like someone who wasted it' also plays a big role. The reluctance to admit waste makes us cling to the wrong choice.
The multiple for loss aversion varies by experiment and situation. Rather than asserting 'exactly 2.5 times,' it's safer to understand it as 'the pain of losing is greater than the joy of gaining.'
Two scenes history has shown
① The Concorde airliner. A supersonic passenger jet built jointly by France and Britain. It made its first flight on March 2, 1969, but its business prospects were dim early on due to noise, high fuel costs, and few passengers. Even so, they pushed the development forward on the grounds that 'the enormous development costs already spent would be wasted.' In the end, only 14 were built and it retired in 2003. The phenomenon of being unable to pull out because of sunk costs is even called the 'Concorde fallacy.'
② The theater season-ticket experiment (Arkes & Blumer, 1985). At Ohio University, the same season tickets were sold to some people at full price and to others at a discount. The shows they could see were exactly identical. Yet those who paid full price attended performances more often than those who got a discount. The sunk-cost psychology of 'I paid a lot, so it'd be wasteful not to go' changed their behavior.
Why this is dangerous in investing
When a stock has fallen far below the price you bought it, many people think: 'I'll sell when it gets back to breakeven.' But the market has no idea what price you paid. Your purchase price is a sunk cost with nothing to do with the future return.
So your judgment should be based not on 'what price I bought at' but on 'how this asset looks going forward.' The real danger is that regret over money you're already stuck in prevents you from coolly assessing the chances of recovery.
This is also why 'The Return of Almost Everything' deliberately shows the maximum drawdown and loss duration without hiding them. If you practice facing losses calmly as 'facts that happened,' you can judge again with data, without being tripped up by sunk costs. For reference, this site is one the author operates personally.
This article does not recommend buying or selling any specific asset. It's not saying 'when to sell,' but talking about a mindset: 'judge by the future, not by past costs.'
Preguntas frecuentes
Q. So should I always sell a losing position quickly?
That's not the point. The key is not to base your judgment on the reason 'because the money I already paid feels wasted.' If, looking at future prospects, you have sufficient reason to keep holding, that's not a sunk cost fallacy but a rational choice. Conversely, if you're clinging on only because of 'breakeven thinking,' that's a signal to review it once.
Q. Any practical tips to reduce the sunk cost fallacy?
Ask yourself: 'If I were seeing this for the first time right now, would I start it fresh?' When you erase what you've already spent and ask purely about the future, the judgment becomes much clearer. Also, automating decisions (such as recurring-investment rules) or seeking a third party's opinion can reduce the intrusion of emotion.
Q. Is it the same as 'breakeven thinking'?
It has almost the same root. Breakeven thinking is the mindset of 'I'll sell when it gets back to the price I bought at,' but the purchase price is an unrecoverable sunk cost that has nothing to do with future judgment. It helps to remember that the market doesn't remember your purchase price.
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📋 Los resultados se basan en datos históricos; las rentabilidades pasadas no garantizan rentabilidades futuras.
📋 Este servicio se ofrece con fines educativos para ayudarte a entender la inversión, no como asesoramiento de inversión.