The Sunk Cost Fallacy in Trading: Why You Hold Losers
The Sunk Cost Fallacy in Trading
The sunk cost fallacy is the tendency to continue an endeavour because of already-invested resources, rather than because the future prospects justify it. In trading, it is the reason a trader who would never open a losing position today refuses to close the identical losing position they opened last week.
The mental frame that fixes it
There is only one honest question at every review point:
Given only the money I have in the market right now, would I choose to keep it in this trade, at this price, with this thesis, versus every other opportunity?
If the answer is no, the position closes. The cost paid to get here is irrelevant — it has already left your account.
Traders who internalise this frame make dramatically fewer catastrophic holds.
What it looks like in the data
- “Wait for break-even” exits that never trigger and eventually stop out at much larger losses.
- Averaging down on a losing thesis because “the position is already open”.
- Refusal to rotate capital to fresher setups because current positions are underwater.
- Journal entries citing entry price rather than current thesis validity.
Why the brain does it
The pain of realising a loss is felt at the moment of closing the trade. Holding it lets the trader postpone that pain — even at the cost of it becoming much larger. This is loss aversion (see our loss aversion article) applied specifically to open positions.
The structural fix
- Pre-committed invalidation levels. Every trade opens with a written level at which the thesis is wrong. When it prints, the trade closes. No debate.
- Rewrite the thesis weekly. For any position held longer than a week, restate the forward thesis in one sentence. If you cannot, the position is being held by inertia, not conviction.
- Fresh-eyes rule. Would you open this trade today at the current price? If no, close.
How EI ALGOS helps
The Decision Score is re-computed on any material re-evaluation of a trade — not only at entry. If the score at the review point is materially worse than at entry, LIANA surfaces the drift.
EI ALGOS is an educational decision-support platform. Nothing in this article is investment advice.
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