Behaviour · General financial education

Sunk cost fallacy

Sunk costs are money or time already spent. They do not change what the next decision will cost or bring in from here.

In more detail

The pattern is to continue because something has already been paid, even though the prospects from here do not carry the decision on their own. The FCA describes this in Occasional Paper 1 as a thinking error in financial decisions. It is a description, not a judgment of character. Finmon does not say whether you should sell or keep something.

Background

Yesterday's purchase price is often already gone for tomorrow's question. What counts are the future costs, the future benefit and the alternatives that are still open. That is the idea of opportunity cost. A loss on paper is not undone by that. Finmon does not know your position and gives no signal.

An example

A price has fallen, and the original purchase price is higher. Keeping the holding only so that the purchase price does not look lost follows the sunk cost. Whether keeping it holds for other reasons is a different question. Finmon does not answer it.

A common misconception

Because a lot has already been paid, the next outlay must make sense.

The old outlay is gone. Whether the next outlay carries depends on what is still to come, not on what is already gone.

Source: FCA Occasional Paper 1. Version 0.2.0. Finmon explains. It does not advise. Not investment, tax or legal advice.