Definition
Sunk Cost Fallacy
The sunk cost fallacy is the mistake of continuing with a losing investment or commitment because of the money, time or effort already spent, rather than judging it on future prospects.
'I've already put ₹5 lakh into this, I can't quit now' is the classic line. But money already spent is gone and irrecoverable; the only rational question is whether the next rupee is better deployed here or elsewhere. Throwing good money after bad — averaging down on a deteriorating company, or pouring into an under-construction project that keeps slipping — is the sunk cost fallacy in action.
The fix is to evaluate every decision forward-looking: ignore what you have already invested and ask whether you would buy this asset today at this price with fresh money. If the answer is no, the sunk cost should not keep you in.
Related terms
- Loss AversionLoss aversion is the well-documented tendency for the pain of a loss to feel roughly twice as powerful as the pleasure of an equivalent gain.
- Disposition EffectThe disposition effect is the tendency to sell winning investments too early to bank a gain, while holding on to losing investments too long to avoid realising a loss.
- Opportunity CostOpportunity cost is the value of the next-best alternative you give up when you choose to use money (or time) one way rather than another.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.