What is the sunk cost fallacy and how does it apply to trading?

Question

F FitFanatic555 on 21.11.2023 Posts: 66

Ever stumbled upon this whole deal about the sunk cost fallacy when talking trading? I've got this mate who won't stop yapping about it. So here's the thing, I get that it's all about costs that have already been done and dusted, ones you can't get back no matter what you do, right? But then, where does trading come in? How's a trader to know if he's tangled up in this fallacy trap or not? Could really use some clarity on this, mates. So, any gurus out there who can break it down for me? Cheers.

Trading-Setup.com - Empower your Trades! · Accepted Answer

The sunk cost fallacy occurs when investors continue a venture due to the time and money already invested rather than future prospects.
In trading, this fallacy leads to holding onto losing positions longer than necessary, hoping to recover losses rather than cutting them.
Overcoming the sunk cost fallacy involves making decisions based on potential future returns, not past costs, thus improving trading strategies.

S SportsStar707 on 05.03.2024 Posts: 50 · Accepted Answer

The sunk cost fallacy in trading is when you cling to a stock or investment just because you've already put a chunk of change into it, instead of cutting your losses when the signs are all screaming at you to bail. It's like you're in a hole and instead of stopping digging, you keep on because, hey, you've already made it this big, right? But that's where you trip up. Those costs, the time and money you've sunk in, they shouldn't weigh in on your next move. In trading, what matters is the future potential, not the cash that's already flown the coop.

In practice, this means that if you've got a stock that's tanking, don't hold onto it just because you hope to break even and salvage your initial investment. That's your sunk cost fallacy at work right there. Instead, you gotta think, "What's this stock going to do for me moving forward?" If the outlook isn't good, sometimes you just gotta take the hit and move on.

How to spot it? Well, it requires being brutally honest with yourself. Are you holding a position because you truly believe in the future gain, or are you just trying to avoid admitting a loss? The psychology of investing can be pretty tough to navigate, but being aware of this fallacy is like a head start in recognizing when emotions might be clouding your judgement.

So, has anyone faced a situation where they've had to confront the sunk cost fallacy head-on? What made you realize it was time to make a different move?