Sunk Cost Fallacy
Posted By: Admin
Among the cognitive biases that is most debilitating from an investment standpoint has to be Sunk Cost Fallacy, when you see more and more irrational investment decisions being followed through under the guise of Rupee cost averaging or any other such logic. So let us understand what is this sunk cost fallacy ?
In business and economics, a “Sunk Cost” refers to any cost that has been paid and cannot be recovered.
Sunk Cost Fallacy refers to a tendency for people to irrationally follow through on an activity that is not meeting their expectations. This is because of the time and/or money they have already invested.
It explains why people finish movies they are not enjoying, finish meals that taste bad, keep clothes in their closet that they’ve never worn and hold on to investments that are underperforming.
Ways to overcome Sunk Cost Fallacy
- Remember your big Picture.
The first step is to define your vision and make your decisions based solely on that, it is not about that particular investment, but about wanting to generate a certain return on your portfolio.
- Let go of personal attachments
Often, to avoid change and shame, we stick with our original decisions even if we know they likely won't succeed. Letting go of anything that has taken up so much of your money and time is a difficult, especially if you have a large emotional attachment.
- Allow yourself to make mistakes and admit them
It may be difficult to admit when you are wrong. But having the ability to accept your mistakes and learn from them is an important part of making better decisions in the future.
Understanding the Sunk Cost Fallacy will enable you to cut your losses in investing and move to a better investment, without endlessly waiting for a miracle.
By Babu Krishnamoorthy, Chief Sherpa
Here's "How to reduce your portfolio risk?"
Category Finsherpa | Tags Financial Freedom
