65-Day Academy · Day 35 · Psychology & Biases
Sunk Cost & the Averaging-Down Trap
The sunk-cost spiral
"I'm already down 15% — selling now makes it real." The 15% is sunk regardless; the only question is the FORWARD prospects at TODAY's price. Sunk-cost thinking turns positions into hostages: the more you have lost, the harder it becomes to evaluate the business rationally. Averaging down can be valid — but ONLY as a fresh decision on fresh analysis at a planned level, never as a rescue of the original entry.
The test
The clean question: "If I held no position, would I buy this much of this stock here, today?" If the honest answer is no, you are not investing — you are managing your regret. The position you would not buy fresh is the position to exit, regardless of what it cost you.
What you'll practise
True or false: averaging down is always irrational.
10 XP in the app · introductory
Sources
- MisbehavingRichard Thaler
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All lessons are for educational purposes only and are not individualized financial advice, a recommendation, or a solicitation to buy or sell any security. Options involve substantial risk and are not suitable for every investor.