Sunk Cost Fallacy — Definition, Examples, How to Fix

What it is

The sunk-cost fallacy says: "I've already lost ₹10,000 on this trade — I can't close it now." The fallacy is treating the prior loss as recoverable through holding, when in fact the loss is already realised mentally and the only question is whether to risk more capital on a position that no longer has a thesis. Closing the trade and reallocating to a fresh setup is almost always the rational choice.

What it looks like

• Holding a -50% options position because "I've already lost so much on it."
• Refusing to cut a losing crypto bag because "I bought at the top and want my money back."
• Adding to a stopped-out position to "average my way back to break-even."

Why it costs you money

Sunk-cost trades typically take 2-3x longer to exit than disciplined trades, and exit at worse prices. The opportunity cost of capital tied up in a sunk-cost loser is also significant — that capital can't take fresh setups.

How TradeSaath detects this

TradeSaath identifies sunk-cost holds by detecting positions held materially longer than your usual time-in-trade, with worsening cumulative P&L and no responsive trade-management actions.

How to fix it

1. Reframe: "Would I open this position fresh today at the current price?" If no, close it.
2. Treat capital as fungible — exit a loser, take a new setup with the same capital.
3. Pre-define max holding time per setup; force exit when it runs out.
4. Track the "would have done better in cash" cost in your journal.

Related

Is sunk cost fallacy costing you money?

Upload your trade history and find out — first analysis is free.