WHAT IS SUNK-COST FALLACY BIAS IN TRADING / INVESTING?

Sunk-cost fallacy is when a person does not cut their losses or abandon a failing strategy because they invested time or money in it, even when it is obvious that it would be beneficial to do so. Humans don’t like admitting defeat or realising a loss, and would rather carry dead weight or continue down a failing path. This applies in business as well.

What are the symptoms? There is an adage for new traders, that when their stop loss is about to be hit, they remove it and declare themselves “long-term investors” just to avoid realising a small loss. This almost certainly leads to a greater loss that never recovers. Have you ever done this? We all have when we started, it’s a right of passage!

Take a look at your investment portfolio. Have you got any assets down 80% or more with dead communities/projects? Maybe that money is better invested elsewhere rather than in hope? Even if it means realising that large loss now!

Even worse, humans double down on these bad habits, escalating matters, buying more, trading more, and convincing themselves they are averaging/doubling down to recoup losses.

How to avoid this? Adapt or die. You must plan every trade & investment with exit criteria, the stop-loss level where you say: “I am no longer interested in holding this asset at this time”. Don’t ignore irrecoverables- make that money work elsewhere. Stick to the plan and forward focus. Don’t feel emotional or bad about taking a loss; you are participating in a world of probabilities, and losses are essential! Instead, be proud of sticking to your plan and managing risk!

Safe trading