🧠 Psychology·beginner

Sunk Cost Fallacy

Continuing a losing course of action because of resources already invested — driving traders to add to losers and refuse to cut losses.

The sunk cost fallacy is the tendency to continue an investment because you've already put money or effort into it, even when continuing makes no sense. In trading, it shows up as "I've already lost $500 on this trade, I can't close it now" or "I've spent two months learning this strategy, I can't abandon it." The fallacy is that money already lost is GONE. It doesn't matter to the next decision. The only question is whether the FUTURE expected return justifies the current action. If the trade no longer has positive expectancy, exit. The fact that you've already lost on it doesn't make staying in any better. Sunk costs are everywhere in trading. Strategies you've spent months learning. Indicators you've bought. Pairs you specialize in. Positions you've held for weeks. None of that history matters for the current decision — only the forward-looking expected value matters.

Real trade example

The collapse of Long-Term Capital Management in 1998 was largely a sunk cost fallacy at scale — the founders kept doubling down on losing positions because of the resources already committed. The result was a $4.6 billion loss that nearly broke the global financial system.

Related terms

Loss Aversion

intermediate

The psychological tendency to feel losses about twice as intensely as equivalent gains — drives bad exits and held losers.

Disposition Effect

intermediate

The tendency to sell winners too early and hold losers too long — the opposite of what profitable trading requires.

Endowment Effect

intermediate

The tendency to value something more highly just because you own it — drives traders to hold losing positions too long.

Anchoring Bias

intermediate

The tendency to rely too heavily on the first piece of information you see (the anchor) when making decisions.

Discipline

beginner

The ability to follow your trading plan exactly — without deviation — regardless of how you feel in the moment.

Overtrading

beginner

Taking too many trades — usually driven by boredom, FOMO, or revenge — and bleeding capital through commission, spread, and forced setups.

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