Definition:The sunk cost fallacy refers to the tendency for people to continue investing in a decision or project because they have already invested resources into it, even if the decision or project is no longer beneficial or profitable. This bias can lead investors to hold onto losing investments for too long and miss out on potential opportunities.
How it Impacts Investors: The sunk cost fallacy can lead investors to hold onto losing investments for too long, even if the asset is no longer viable. This can result in significant losses, as they may miss out on opportunities to invest in more profitable ventures. For example, an investor may hold onto a losing stock because they had invested a large sum of money into it rather than cutting their losses and investing in more profitable options.
How to Handle: To handle the sunk cost fallacy, investors should recognise that their past investments have no bearing on the current investment worthiness of a stock. They must set aside their emotional involvement and take decisions based on the current and potential future costs and benefits.