The sunk cost fallacy is continuing something because of what you have already put in, instead of what you expect to get out. In trading, it means holding a loser, adding to it or chasing a lost challenge fee, because money that is already gone feels like it has to be earned back.

A sunk cost is any cost you cannot recover. Logically it should play no part in your next decision, because nothing you do now changes it. Emotionally it often decides everything.

What does the research show?

In a field experiment at a university theatre, Hal Arkes and Catherine Blumer sold season tickets at three prices: full price, a small discount and a large discount. The people who paid full price went to more plays than the people who got a discount, even though the plays were identical for everyone (Arkes and Blumer, 1985). Having paid more, they felt they had to get their money's worth.

Traders face a sharper version. After a loss, options that offer a chance to break even become especially attractive, even when they carry more risk (Thaler and Johnson, 1990). That is the sunk cost fallacy with a live chart attached.

5 examples of the sunk cost fallacy in trading

1. Holding a loser because you are already down this much

"I am already down $300, closing now would waste it." The $300 is gone either way. The only question is whether this position deserves to stay open from here.

2. Averaging down without a plan

Adding to a losing trade to improve your average price feels like fixing the trade. It is usually doubling the bet on a setup the market has already rejected. Planned scaling with a fixed size and invalidation is a strategy. Unplanned averaging down is the fallacy.

3. Trading on to win back a challenge fee

A prop firm fee is spent the moment you pay it. Trading bigger to "not waste" it is how many challenges end, as covered inprop firm challenge protection anddo prop firms profit from tilt.

4. Sticking with a strategy because of the months you put into it

Time spent building a system is not evidence that it works. Judge a strategy on a sample of trades, not on the hours behind it.

5. One more trade to get back to flat

The red day feels like a debt that has to be cleared before you can stop. That single thought is the engine of revenge trading, and it is howone loss becomes ten trades.

How do you break the sunk cost fallacy?

Ask one question: if I had no position and no losses today, would I open this trade now, at this size? If the answer is no, the sunk cost is the only thing keeping you in.

  • Decide the exit before the entry. A stop set in advance cannot be argued with later.
  • Treat fees and losses as the price of the attempt, not as a balance you owe yourself.
  • Make the day end on a number. A daily loss limit means the urge to win it back has nowhere to go. EmotionLock blocks your trading apps on iPhone when you hit it.

How is it different from the disposition effect?

They overlap. The disposition effect is about selling winners too early and holding losers too long. The sunk cost fallacy is about letting what you already spent drive the next decision. Both keep a losing trade open, which is why they tend to appear together. More biases like these are in our guide totrading psychology.

Sources

  1. Arkes, H. R. and Blumer, C. (1985). The psychology of sunk cost. Organizational Behavior and Human Decision Processes, 35(1).
  2. Thaler, R. H. and Johnson, E. J. (1990). Gambling with the House Money and Trying to Break Even: The Effects of Prior Outcomes on Risky Choice. Management Science, 36(6).
  3. Kahneman, D. and Tversky, A. (1979). Prospect Theory: An Analysis of Decision under Risk. Econometrica, 47(2).

Frequently asked questions

What is the sunk cost fallacy in simple terms?

It is continuing with something because of what you have already invested in it, instead of what you expect to get from it from now on. The money, time or effort already spent cannot be recovered, so it should not decide the next step, but it often does.

What is an example of the sunk cost fallacy in trading?

Holding a losing trade because you are already down $300 and closing it would make that loss real. The $300 is gone either way. The only question that matters is whether you would open the same trade now, at the same size.

Is averaging down always the sunk cost fallacy?

No. Scaling into a position with a size and invalidation level planned before the first entry is a strategy. Adding to a loser because you want a better average price after the trade has gone against you is the sunk cost fallacy.

How do you stop the sunk cost fallacy when trading?

Set your stop before entry, judge every open trade by whether you would enter it now, treat fees and losses as the cost of trying, and use a daily loss limit so the urge to win money back cannot turn into more trades.