Sunk Cost Fallacy
Why do we continue with a decision, not because it still makes sense, but because we have already invested so much into it?
A position is reviewed, and the case for holding it is no longer as strong as it once was. New information has emerged, or perhaps the original reasoning has weakened. And yet, the idea of stepping away feels difficult. Time has been spent. Capital has been committed. Letting go can feel like those earlier decisions are being written off.
This is where the sunk cost fallacy begins to influence behaviour. Rather than focusing on the current merits of a decision, attention shifts to what has already been invested. The past begins to weigh on the present, even though it cannot be changed. The decision is shaped not only by what lies ahead, but by what has already been put in.
The concept has been studied across economics and psychology, including early work by Richard Thaler and others who explored how prior investment affects ongoing choices. In various experiments, individuals were more likely to continue a course of action if they had already committed resources to it, even when stopping would lead to a better outcome. The previous investment created a sense of obligation, rather than being treated as irrelevant to the next decision.
In markets, this can lead to positions being held longer than they should be. An investor may continue to support a declining investment because of the time, research, or capital already committed. The decision becomes less about future potential and more about justifying past actions. Over time, this can lead to increasing exposure to positions that no longer meet the original criteria.
What makes this difficult to recognise is how reasonable it can feel. Commitment is often seen as a positive trait. Persistence is valued. The challenge is that in investing, persistence can sometimes become attachment, particularly when past decisions are allowed to influence present judgement.
You may notice this in yourself when you feel reluctant to move on from an investment because of what you have already put into it, or when closing a position feels like admitting that the earlier effort was misplaced. There can also be a tendency to focus on recovering what has been lost, rather than reassessing the situation from where it stands today.
Sunk costs don’t change what happens next, but they can make it harder to decide what should.