Sunk cost fallacy causes investors to throw good money after bad investments from "summary" of The Little Book of Behavioral Investing by James Montier
The sunk cost fallacy is a common cognitive bias that influences decision-making process of investors. This bias occurs when individuals continue to invest in a losing proposition simply because they have already committed resources to it. In other words, they are unwilling to cut their losses because they have already spent time, money, or effort on the investment. This irrational behavior is driven by the desire to recoup the initial investment, even when it is clear that the investment is not performing as expected. Investors fall victim to the sunk cost fallacy when they allow past decisions to cloud their judgment about the future prospects of an investment. Instead of objectively assessing the current situation and making a rational decision based on new information, they cling to the hope that their past investment will eventually pay off. This leads them to pour more money into a failing investment, compounding their losses in the process. The sunk cost fallacy can be particularly damaging in the world of investing, where emotions often run high and decisions are made under conditions of uncertainty. By succumbing to this bias, investors end up throwing good money after bad investments, in a futile attempt to salvage their sunk costs. This not only erodes their wealth, but also undermines their ability to make sound investment decisions in the future.- Investors must learn to separate their emotions from their investment decisions. They should be willing to accept their losses and move on, rather than letting past investments dictate their future actions. By focusing on the fundamentals of an investment and staying disciplined in their approach, investors can avoid the sunk cost fallacy and improve their overall investment performance.
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