Sunk Cost Fallacy in Investing (Deep-Dive)

The sunk cost fallacy is the tendency to continue with a course of action because of investment already made (money, time, emotion), even when forward-looking evidence says abandoning is better. In economic logic, sunk costs are irrelevant to future decisions — but humans rarely reason that way.

Investing variants of the sunk-cost fallacy: (a) Holding a losing stock to avoid "realising" the loss; (b) Continuing SIPs in a fund that has structurally underperformed for 5+ years; (c) Following through on a thesis even after the thesis has been falsified, because of months of research effort; (d) Holding a property because of stamp duty + registration costs already paid, even when the asset is clearly underperforming.

Sunk-cost fallacy frequently combines with loss aversion and anchoring to lock investors into poor positions for years.

Example 1: An investor put Rs 50 lakh into a single concentrated stock 6 years ago. Position now worth Rs 20 lakh; thesis disproved (fraud, competition, regulatory shift). The investor refuses to sell because "I've lost too much already". The Rs 30 lakh loss is sunk — the only relevant question is what the Rs 20 lakh will do in the NEXT 5 years, and whether redeploying it elsewhere gives a better forward return.

Example 2: Years of SIP into a fund that has lagged its benchmark by 4%+ p.a. The investor continues because "I've been in it for 8 years". The 8 years are sunk. The forward question: does this fund's strategy / management / cost structure justify the next 8 years?

Defence: Frame every decision as: "If I had no position today and Rs X to deploy, where would I put it?"

Disclaimer: Educational content from MintByte (ARN-314872, MFD). Examples are illustrative. SEBI Investment Adviser registration is in process; we do not provide personalized advice.