What is Sunk cost fallacy?
Qaytmas xarajat xatosi
In short
Sticking with a bad decision because of money or time already lost: "I've lost so much, I can't sell now". The market does not know your entry price.
Also known as: sunk cost
The sunk cost fallacy is sticking with a bad decision because of money or time already spent and impossible to recover. In trading it usually sounds like: "I've lost so much, I can't sell now", or "I spent a month researching this stock, so I'm not getting out".
Why it's irrational
The market doesn't know or care about your entry price. Whether you bought at $80 or $40, tomorrow's move is the same. The only right question is: "At today's price, with today's information, would I buy this stock?" If the answer is no, holding the position is effectively the same as buying it fresh at this price.
Dangerous forms for a trader
- Waiting for a losing position to get back "at least to breakeven".
- Averaging down: adding to a loser "to lower the average price". This increases risk: the position grows while the idea hasn't changed.
- Refusing to drop a strategy that isn't working because "I've invested so much time in it".
What helps
Set a stop-loss in advance on every trade and respect it. And know that this bias works hand in hand with loss aversion: both delay accepting a loss. A planned DCA (investing on a pre-set schedule) is different — it follows a plan made in advance, not an attempt to avoid a loss.
Example
An investor bought 50 shares of an illustrative stock at $80 = $4,000. Price fell to $56:
- Loss: 50 × $24 = $1,200 (−30%).
- Gain needed just to get back to $80: $24 ÷ $56 ≈ +42.9%.
The "averaging down" option: another 50 shares at $56 ($2,800). Now 100 shares, total cost $6,800, average price $68. Getting back to breakeven needs +21.4% ($12 ÷ $56) — it looks "easier". But if price falls further to $46, the loss is 100 × $22 = $2,200, instead of the original $1,200.
Check the gain needed to recover in the drawdown calculator.
Mistakes and tips
Keep your entry price out of the decision: ask "would I buy it at this price today?"
Add to a losing position only if it was in a written plan — emotional "averaging down" multiplies risk.
Set a limit for strategies too: for example, if expectancy is negative after 50 trades, review it.
Frequently asked questions
- Should I hold a losing stock or sell it?
- That depends on the current situation, not your entry price: is the idea still valid and is the stop intact? "I've already lost so much" is not a reason to hold.
- Is averaging down always a mistake?
- If it's planned in advance with a clear risk limit, it can be a strategy. Adding without a plan to hide a loss is the classic sunk cost fallacy.
Learn it in the Academy
This term is covered with hands-on examples and a quiz in these lessons of the interactive course.
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