The Sunk Cost Fallacy: Why Investors Refuse To Sell Losing Stocks?

There is a place on Mt. Everest called the Death Zone, which is above 8,000 meters, where the air is so thin that the body starts to shut down. It's where perception becomes unclear, judgement fails, and the top, which is so close, can lead climbers to make deadly mistakes.

After years of planning, Ed Viesturs stood just 300 feet from the top of Everest in 1987. But when his watch said it was 2 PM, the time he had set for himself to turn around, he took a choice that very few people would have taken: he turned back.

His teammates were shocked. The top was in sight. Viesturs, on the other hand, knew the truth: "Getting to the top is optional." You have to get down. That one choice kept him alive.

We have our own version of the Death Zone when it comes to investment. There may not be any snowstorms or lack of oxygen, but our minds do get obscured by feelings, ego, and the Sunk Cost Fallacy, which is a dangerous mental trap.

The mistake that costs a lot of money

"The Sunk Cost Fallacy is a mental mistake that makes us stick with terrible choices, not because they still look good, but because we've already spent too much to change our minds," said Chakravarthy V., Cofounder & Executive Director, Prime Wealth Finserv.
This happens a lot when you invest.

You pay Rs 100 for a stock. It goes down to Rs 60. Logic says to look again. But your brain doesn't see an Rs 60 item. He sees a Rs 40 error that needs to be repaired. So you wait. "I'll sell it when it goes back to Rs 100."

The stock doesn't remember what you paid for it. But you do. And now you're stuck, not because of the fundamentals of the market, but because you have to be correct.

"In finance, this is called "summit fever." Investors keep going, not because it's smart, but because going back seems like giving up. In fact, it's usually the most brave - and profitable - thing you can do," commented Chakravarthy V.

The market doesn't care about your past.

"It's easy to forget that markets don't care. They don't know that you worked 60 hours a week to get that money. They don't care that you've owned a stock for a long time. The pricing merely shows what the market believes it's worth right now. That's all," stated Chakravarthy V.

But we stay strong. We lower our average. We explain. "I've already put so much into this."

That's when ego takes the place of strategy. You're not investing anymore; you're protecting a prior version of yourself.

And that might kill you.

The price of refusal

"Investors are very familiar with the term "paper loss." If you don't sell, the loss isn't real; it's just a line on your portfolio tracker. But this delusion takes up time, chances, and emotional energy," stated Chakravarthy V.

You aren't waiting for the stock to go back up. You are putting off forgiving yourself.
And the longer you wait, the more probable it is that you'll lose out on something better. The market doesn't wait for you to stick to your old choices.

The Viesturs test for investors

Try this test: If your whole portfolio was sold off overnight and you woke up with all your money in cash, would you buy the same stocks again at today's prices?

If the answer is no, then why are you still holding them?

This question takes away your ego and makes you choose based on merit, not recollection.

What you need to do to let go?

Getting over the sunk cost fallacy isn't only about logic; it's also about who you are.

"To say you lost means you were wrong. For a lot of investors, that seems impossible to bear. But to stay alive in the market, like on a mountain, you have to let go. Letting go of the top. Giving up pride. Letting go of the tale you told yourself about what should happen," said Chakravarthy V.

In 1990, Viesturs finally made it to the top of Everest when the weather was better. He made it to the top because he had the willpower to walk away the first time.

He might never have gotten another chance if he hadn't. Your past is not your plan.
"As an investor, your money is the only thing that matters. It's like getting into a hurricane simply because you've come so far: wasting it on a lousy investment just because it used to look wonderful," added Chakravarthy V.

Like mountains, markets don't talk. You either change, or you die. The only thing left to ask is if you will.

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