Sunk Cost Bias

The sunk cost bias is a cognitive error in which investors or decision-makers continue a losing position or project because they have already invested money, time, or effort into it—despite evidence that abandoning it would be the rational choice. Sunk costs are money spent in the past that cannot be recovered; emotionally, they still loom large in the decision to quit.

Why sunk costs should not drive decisions

Rational finance dictates that only forward-looking expectations matter. If you bought a stock at $100 and it has fallen to $60, the $40 loss is history. Your decision to hold or sell should depend entirely on whether you expect the stock to recover relative to alternatives. The money spent to acquire it is irrelevant to the future. Yet many investors hold losers because “I can’t sell at a loss” or “I need to wait until I break even.” This is the sunk cost trap.

The psychology: loss aversion and regret

Loss aversion makes us feel losses roughly twice as acutely as equivalent gains. If you have lost $10,000, the psychic pain is enormous. Selling the losing position locks in that pain; holding it leaves hope alive. Investors tell themselves the stock “will bounce back” or the real estate market “will recover”—often with increasingly thin evidence. Regret also plays a role: you fear telling yourself (or others) that you made a bad call and made it worse by holding.

Sunk costs in common portfolio scenarios

Stock traders trapped by sunk cost bias often nurse underwater positions far longer than they should. A classic pattern: buy a penny stock at $2, watch it fall to $0.50, and then spend years hoping it “turns around.” Each new piece of bad news is rationalized as temporary. The cost of being wrong (admitting the mistake and selling) feels worse than the cost of being right later (if recovery ever comes).

In real estate, homeowners sometimes sink money into repairs and renovations for underwater properties, trying to recoup prior investments rather than minimizing losses. In mergers and acquisitions, organizations sometimes throw good capital after bad into integration projects that show negative returns, because abandoning them would mean admitting the deal was a mistake.

Testing for sunk cost bias

Ask yourself: “If I had not already invested, would I invest today at current prices?” If the answer is no, sunk costs are probably driving your hold decision. Another test: “What would a rational stranger do with my portfolio right now?” If you would tell that stranger to sell while you cling to the position, sunk costs are the difference.

Institutional contexts and the bias

Professional investors and fund managers are not immune. Fund managers sometimes continue backing underperforming portfolio companies because of the sum already deployed. Central banks can fall prey to the bias when supporting sovereign debt of troubled nations, hoping to avoid admitting earlier lending misjudgments. Venture capital firms occasionally throw follow-on capital into struggling startups for the same reason.

Breaking free: mental accounting and discipline

One antidote is mental accounting—compartmentalizing investments and evaluating each one independently rather than as part of a sunk-cost narrative. Another is precommitment: set a stop-loss or exit price before positions deteriorate, so emotion does not override logic. Tax-loss harvesting (selling losers to offset gains) can also be framed as a rational move rather than an admission of error. Reframing the sale as tax-efficient rather than a capitulation can make the decision easier.

Interaction with other biases

Sunk cost bias often compounds with confirmation bias, where investors selectively seek news that supports holding (the stock “has great fundamentals”) while ignoring evidence it will not recover. Anchoring to the original purchase price also stiffens resolve to hold until the stock returns there. Together, these biases can chain investors to poor positions for years.