Thread by @FincademyIn

Holding a stock just because you bought it at higher price ?

A Thread on Sunk Cost Fallacy 🧵👇

1/ A friend of mine had been working on a project for 7 months. He gave in all his time, energy and money to make it successful.

2/ At a small discussion about this topic, he told me that he was not sure if the project was going to work.

However, he would still continue to work on it since he has already spent a lot of time and money on it.

3/ The other day, I met an old colleague of mine after 6 years. We decided to catch up at a Standup comedy show in the evening. After 30 minutes into the act, both of us realised that the comedian is just trying to make everything funny by using cuss words against people from the

4/ audience for his jokes. Nothing he said was funny to us. We both agreed it wasn't worth it. However, my colleague kept saying that we should watch the entire act as we have paid the money for it.

5/ Sunk Cost Fallacy is a behavioral bias that acts as a roadblock when we have invested a lot of time or money into something. The investment becomes a reason to carry on even when we have lost the very purpose of the activity.

6/ Greater the sunk cost, greater is the urge to continue.

In investing, investors / traders often fall into Sunk Cost Fallacy.

For example, I bought the stock at ₹100 and now it is at
₹10, I cannot sell it now as I'm in huge loss.

7/ This is irrational thinking. The purchase price of stock should not play a role in deciding whether to sell the stock or hold. If the fundamentals have worsened then it shouldn't matter at what price you bought the stock.

8/ It doesn't matter how much cost you have incurred on a particular investment. What matters is your assessment about its future benefits.

9/ In case of a project that you feel wont work, the time and money invested in past should not decide the future course of action.

10/ Leaving the unfunny comedy act in the middle of it is a rational choice rather than staying there till the end just because you have paid for it.

11/ Similarly, evaluating the investment on merits of its future performance is the most important and rational choice rather than holding on to it just because you bought it at a higher price.

Written by @RJGyanchandani

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