How to Avoid the Trap of Sunk Costs

Market Meditations | March 27, 2021

The sunk cost fallacy is where we spend further resources – time, effort or money – to pursue a decision, purely based on the fact that we have already spent resources on this decision. ❌

As well as improving our general decision making process, we can also use the sunk cost fallacy to avoid common mistakes in our financial lives. This includes:

  1. Holding onto an investment simply because we have spent money on it. Whilst conviction is important, maintain mental flexibility and be ready to to change opinion based on new information.
  2. Pursuing a career because we have already invested time and money into the required education. If you think you have better opportunities in another field, do not let an expensive education sway your decision making process.
  3. Putting more time into a project that isn’t working. Whether this be a trading system or a business venture, investing more time simply because we do not want to admit it is not working only damages our future further.

The sunk cost fallacy can have a serious impact on our ability to make the correct decisions. Be aware of it and always make sure your decisions look into the future, not into the past. ✅