The Sunk Cost Fallacy: Why You Hold On to Losing Investments

🪤 What the sunk cost fallacy is🔗

The sunk cost fallacy is the habit of continuing with something because of what you have already put into it, rather than because of what it will give you from here. The money is already spent. It is gone whichever option you pick next. So it should carry zero weight in the decision, and yet it usually carries most of it.

Economists call the already-spent money a sunk cost. The word sunk is doing the work: it is at the bottom of the ocean, and no decision you make today brings it back up. The only question that matters is what happens next.

🧠 Why your brain does it🔗

Three things are happening at once, and none of them are stupidity.

• Losses hurt more than equivalent gains feel good. Dropping $5,000 stings considerably more than making $5,000 pleases. So we go a long way to avoid making a loss official.
• We want to be consistent with our past selves. Selling means the person who bought was wrong. Holding means the story is still being written. One of those is much more comfortable.
• Effort feels like ownership. The more research you did before buying, the harder it is to walk away. Ironically, the investors who did the most homework are often the most stuck.

This is why simply knowing about the fallacy does not cure it. You need a rule that works when you are not feeling rational, which is exactly when it matters.

📉 The share you cannot bring yourself to sell🔗

Here is the version almost every Australian investor meets eventually. You bought a stock at $40. It is now $12. You have watched it for three years. You will sell, you tell yourself, once it gets back to what you paid.

That sentence contains the entire fallacy. The market does not know what you paid and has no obligation to return there. Your purchase price is information about your past, not about the company's future. A share that has fallen 70% needs to rise 233% just to get you back to flat, and there is no rule saying the same business is the best place for that money.

🎯 The essential: The real test is not whether you are down. It is whether you would buy this today, at today's price, with money you had sitting in your account. If the answer is no, you are not investing in it. You are just refusing to sell it.

The same trap shows up in a thematic ETF bought at the top of a hype cycle, an expensive active fund that has trailed its index for five years, or a single speculative crypto position from 2021. If the reason you are still holding is the entry price, that is not a thesis. For what a genuine market decline looks like and how long recoveries usually take, our guide to bear markets is worth reading alongside this.

🏚️ Where else it costs Australians money🔗

Notice that the right-hand column never mentions what was already spent. That is the whole discipline, and it is harder than it sounds.

🎯 The one question that breaks it🔗

There is a single question that cuts through nearly every version of this trap.

If yes, keep holding. You are making a genuine forward-looking decision and your entry price is irrelevant. If no, then holding is a decision to buy it again today, because that is functionally what you are doing every morning you do not sell.

Most people find this question uncomfortable, which is a good sign it is working. It removes the escape hatch of waiting for break-even and forces the question the market is actually asking you.

🧾 A loss is not wasted money🔗

Australians often talk about a realised loss as though the money has evaporated at the moment of selling. It has not. The value went when the price went. Selling only changes the paperwork.

And the paperwork can work for you. Under Australian tax rules, a realised capital loss can be applied against capital gains, either in the same financial year or carried forward to offset gains in later years. It cannot be applied against your salary or other ordinary income, which is a common misunderstanding worth getting right.

🎯 The essential: This is a reason not to fear the sell button, not a reason to sell. Never let the tax tail wag the investment dog, and speak with a registered tax agent about your own circumstances before acting.

If you want the mechanics in full, see our guides to capital gains tax on shares and using losses to cut a tax bill.

🛠️ Rules that stop it happening again🔗

Willpower in the moment loses. Rules set in advance win. Three that work:

• Write the thesis down when you buy. One paragraph on why you bought and what would make you wrong. Reading your own words later is far more persuasive than arguing with yourself from memory.
• Review on a schedule, not on a feeling. A calendar reminder twice a year beats checking the app during a bad week. Decisions made while watching a price move are rarely your best ones.
• Prefer structures that make the question rare. Broad, diversified holdings bought regularly give you far fewer individual sell decisions to agonise over. That is not a coincidence, it is most of the appeal. Our guide to building a simple portfolio covers the practical side.

The goal is not to become someone who never makes a bad investment. It is to become someone whose bad investments stay small, because they get closed on evidence rather than held out of pride.

❓ Frequently asked questions🔗