Sunk Cost Fallacy
The risk of holding a failing position because selling feels like admitting defeat, and how long-term investing can mask this bias.
The sunk cost fallacy in investing is the tendency to hold a failing position because selling feels like admitting defeat. The loss becomes real when you sell, so you hold — not because the forward case is strong, but because the act of selling is psychologically painful.
The irrelevance of purchase price
The price you paid for a stock is irrelevant to whether holding is the right decision today. Your cost basis is a historical fact about a past transaction. It has no bearing on the company's future prospects, competitive position, or intrinsic value.
What matters is the forward case. Is this business going to generate attractive returns from the current price? That question has the same answer regardless of whether you are sitting on a 50% gain or a 50% loss.
Would you buy this stock at the current price if you didn't already own it? If the answer is no — or "only a small position" — that is information. It does not automatically mean sell, but the holding decision deserves genuine scrutiny rather than passive continuation.
How long-term investing enables the fallacy
Long-term investing can provide convenient cover for sunk cost fallacy. The language of patience and conviction — "I'm a long-term holder," "I don't sell on short-term noise" — can be genuinely correct or it can be a rationalisation for avoiding a difficult decision.
The difference is whether you have actively re-evaluated the forward case or whether you are simply not selling because selling is uncomfortable.
Acknowledging the bias honestly is more valuable than dressing it up as a rational long-term decision. Being a long-term investor does not protect you from sunk cost fallacy. If anything, it can enable it by providing a ready-made justification for inaction.
Distinguishing patience from paralysis
Genuine patience is an active decision to hold because the thesis remains intact despite short-term adversity. It is informed, deliberate, and periodically re-evaluated.
Sunk cost paralysis is a passive failure to sell because the loss feels unacceptable. It avoids re-evaluation because re-evaluation might lead to the uncomfortable conclusion that selling is warranted.
The practical test: when was the last time you genuinely stress-tested the thesis on your worst-performing positions? If the answer is "not recently," the holding decision may be passive rather than active — and passive holding is where sunk cost fallacy lives.
Related
- Durable Sell Triggers — The specific conditions that should override the desire to hold
- Thesis-Based Selling — How to evaluate whether the forward case still justifies holding
- Timing Bias in Selling — The opposite problem: selling too early because of emotional pressure