Hi, I'm wanting to hear from experienced investors on this one. I think a lot of people fall prey to the sunk cost fallacy, and I would like to know why.
let's say person A invested in Google two years ago and is up 100 percent, but owns 100k worth today
let's say person B invested in Google two months ago and is down like ten percent, but owns 100k worth today.
It seems like most people would advise person A to hold, but advise person B to cut their losses. but why? the two portfolios are identical. Your previous entry point doesn't affect whether google will gain or lose money in the future.
so why do people do this? why are they more comfortable holding in bad positions, just because they previously made money on them?
Why do we fall for the sunk cost fallacy?
byu/dr_eh ininvesting
Posted by dr_eh
18 Comments
Who says we would advise person B to cut their losses? That’s like saying sell on nvidia because it’s down. We are long term investors
> It seems like most people would advise person A to hold, but advise person B to cut their losses.
Would they? The only person I could imagine thinking this is someone who is pessimistic on Google’s outlook. If both people thought Google would rebound, they’d probably both choose to hold.
Also person B *would* benefit from selling if they want to offset taxes on other gains.
I think most people would actually advise Person A to trim and Person B to do nothing. So I guess I disagree with your entire premise.
I wouldn’t advise anyone down £10k on Google to sell low after buying high.
If they’re only down 10% on a tech stock and still believe in the company person B should either sit on their hands and do nothing or otherwise maybe average down.
This is not an example of sunk cost fallacy.
Because the same good result is better for A than B and always will be, whereas any negative only harms the benefit of A for a while but harms B directly, so B objectively is in the worst spot despite being identically placed for the future. Thus b must react faster than a.
Idk who is investing that size and jumping that fast, but thats the idea.
because we’re just jumped up monkeys, friend. shiny shit and warm fuzzies work every time.
The only reason why I’d tell one to sell and one to hold would be if google is likely to have very little/ no movement in its price over the next month. Then you’d want to sell the losing position to get the tax loss benefit, and could rebuy after 31+ days
“so why do people do this? why are they more comfortable holding in bad positions, just because they previously made money on them?”.
That’s not sunk cost fallacy. Previously making money on them doesn’t matter (to the fallacy). The ‘sunk cost’ part of the fallacy is that of the money (cost) spent on the investment (the basis). The fallacy is about irrationality (emotionally) counting that cost/expense in a decision to buy more, sell, etc, versus just accepting your current holding and making a decision based solely on that.
umm… not sure your example is about sunk cost fallacy. Sunk cost fallacy would be more akin to a purchase of a meme stock like GME at the peak and refusing to cut their losses and put that money to use in a bluechip or index.
Buying a blue chip like GOOG whose growth was based on the company’s success (not a fad) and riding out a downturn is very different than the sunk cost fallacy keeping the others in GME.
Sounds like you don’t know what sunken cost fallacy is judging by your example.
In both cases the asset could be held for future gains not based on past investment. Therefore it’s not an applicable example for the sunk cost fallacy.
Furthermore I’m not sure people would offer the advice as you are indicating.
> most people would advise person A to hold, but advise person B to cut their losses
Who? Who are these “people”.
Most people on this sub would advise both to hold, especially a stock with solid fundamentals like google.
Not sure what your point is here, as it does not make much sense. Maybe this would apply to meme stocks and gambling like wsb.
I think this was an example of a sunk analogy fallacy.
wtf is this post lol
Because not letting losers blow up is the key
For the average person Holding is always better than selling. Unless you need the money now