Psychology and Investing: Sunk Costs

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Sunk cost fallacy is another factor driving loss aversion.

This theory states that we are unable to ignore the “sunk costs” of a decision, even when those costs are unlikely to be recovered.

Our inability to ignore the sunk costs of poor investments causes us to fail to evaluate the situation on its own merits.

Sunk costs may also prompt us to hold on to a stock even as the underlying business falters, rather than cutting our losses.    

[?Had the dropping stock been a gift, perhaps we wouldn’t hang on quite so long.]

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