Sunk Cost Fallacy
The sunk cost fallacy is continuing with a losing idea because of what you have already put in, rather than judging it on what happens next.
Money already lost is gone whatever you do next, yet it often drives the next decision. The sunk cost fallacy is letting past losses or effort keep you in a trade that no longer makes sense. It is a major reason traders hold losers and add to them.
- Reading time
- 3 min
- Also called
- Sunk cost effect, Escalation of commitment, Throwing good money after bad
- Updated
Sunk costs in plain words
A common investor mistake is selling winners and holding on to losers — the disposition effect.1
The sunk cost fallacy is one of the forces behind loss aversion.2
Because we can't forget what we already lost, we fail to judge the position on its own merits.2
How to avoid the sunk cost trap
Ask the fresh-entry question
Would you open this trade now, at today's price?
Use a hard stop
Set the Stop Loss before entry and do not move it.
Ignore the entry price
Don't hold a loser just to get back to breakeven — that's hope, not a plan.3
No averaging without a plan
Adding to a loser must be a planned rule, not a reaction.
Watch loss aversion
Notice when you're avoiding a decision just because it would lock in a loss.4
Review exits
Check in your Trading Journal how long losers were held versus winners.
Worked examples
Example 1 — Holding to get even
Anchored to entryA hypothetical stock bought at 50 falls to 40; the trader waits to get back to 50.
| Loss on paper | −20% |
| Reason to hold | Entry price only |
Sunk costs stop the trader evaluating the position on its own merits.2
Example 2 — Adding to a loser
EscalationA hypothetical trader doubles a losing position to lower the average price.
| Original risk | 1R |
| Final loss | −3R |
Avoiding decisions that lock in losses turned a small loss into a large one.4
Example 3 — Clean exit
Moved onA hypothetical trader exits at the planned stop and re-enters later on a new setup.
| Stop-out | −1R |
| New trade | +2R |
Ignoring the sunk loss avoids holding onto losing positions and frees capital for a better trade.1
Sunk-cost thinking vs fresh-entry thinking
| Aspect | Sunk-cost thinking | Fresh-entry thinking |
|---|---|---|
| Key question | How do I get my money back? | Would I buy this now? |
| Reference point | Entry price | Current evidence |
| Action on losers | Hold or add | Exit by rule |
| Result over time | Larger losses | Smaller losses |
Where the sunk cost fallacy appears
Losing trades
Refusing to hit the Stop Loss.
Averaging down
Adding to a loser without a plan, raising Exposure.
Strategies
Keeping a failed Trading Strategy because of time invested.
Drawdowns
Trading bigger to escape a Drawdown.
Advantages and disadvantages
Advantages
- Awareness makes exits easier.
- The fresh-entry question is simple.
- Hard stops remove the debate.
- Frees capital for better setups.
Disadvantages
- Realising losses feels painful.
- Some positions do recover, reinforcing the habit.
- It ties in with loss aversion.
- Hard to spot while in the trade.
Going deeper
Read as far as you need. Each level builds on the one before it.
The pattern
Beginner
The SEC-published report names holding onto losing positions, the disposition effect, as a common error.1
Link to loss aversion
Intermediate
The sunk cost fallacy feeds directly into Loss Aversion.2
Regret
Advanced
Wanting to avoid regret makes investors sell winners and keep losers — the same pattern sunk costs encourage.5
Common mistakes
Anchoring to entry price
The market does not know it.
Moving stops
Sunk cost in disguise.
Averaging down by feel
Escalation of commitment.
Keeping dead strategies
Time spent is also sunk.
Check your understanding
Test yourself before moving on. Each answer comes with an explanation.
Key points to remember
- Past losses are already gone.
- Judge trades on their own merits.
- Use hard stops.
- Do not add to losers by reflex.
- It is closely linked to loss aversion.
Frequently asked questions
Is averaging down always sunk-cost thinking?
Why is it so hard to sell a loser?
How is it different from loss aversion?
Further learning
- Loss Aversion
The related bias.
- Stop Loss
Removing the decision.
- Trading Discipline
Taking the planned exit.
- Drawdown
Recovering the right way.
Sources
This article is written in our own words. The sources below support the specific facts, rules and figures marked with a number in the text. Links open the original publisher’s page.
- SEC (Library of Congress report). Behavioral Patterns and Pitfalls of U.S. Investors (opens in a new tab) Checked .
- Morningstar. Don't Get Caught by These 10 Behavioral Pitfalls (opens in a new tab) Checked .
- CMC Markets. Common trading mistakes: 10 errors UK traders should avoid (opens in a new tab) Checked .
- CMC Markets. Inside the Mind of the Trader (opens in a new tab) Checked .
- UC Berkeley Haas School of Business. Trading is Hazardous to Your Wealth / The Courage of Misguided Convictions (Barber and Odean) (opens in a new tab) Checked .
Educational content, not financial advice. Examples use hypothetical prices and simplified costs; actual fees, margin rules and regulations vary by broker, market and country. We are not affiliated with any publisher linked above. Last reviewed . Report an error or request a source credit.