ForecastingStocks

The sunk-cost fallacy is the tendency to keep investing in something because of what you have already put in — money, time, or emotion — rather than judging it on its future prospects alone.

The market example

You have held a losing position for six months. It is down 40%. A clearly better opportunity appears, but you can't bring yourself to switch, because selling now would "waste" the half-year and the loss you've endured. So you stay, tying up capital in a bad trade to honor a cost you can never get back.

The same logic traps traders into averaging down indefinitely — adding more to a loser to "lower the average," which is often just throwing good money after bad to avoid admitting the original call was wrong.

The key insight

Money and time already spent are gone regardless of what you do next. They are sunk. The only rational question is forward-looking: given today's reality, is this the best place for my capital and attention? What you paid, how long you've waited, and how much you've lost are all irrelevant to that question.

How to counter it

Evaluate every position as if you opened it today at the current price with current information.
Separate the decision from the history. The hours of research you did do not make a broken thesis correct.
Set rules that force the exit: a stop-loss closes the position before sunk cost can take hold, removing the decision from the emotional moment.
Reframe switching as freeing capital, not as wasting what came before.