Sunk Cost Fallacy: Fish or Cut Bait?

I recently discovered an amazing YouTube channel called The Swedish Investor. My favorite episodes cover famous investing books. Most are titled “Five Lessons from…”

In his review of Daniel Kahneman’s “Thinking Fast and Slow,” The Swedish Investor touched on the sunk cost fallacy. He says sunk costs in investing are one of the most common mistakes all investors on any level make.

It’s difficult to give up on a stock when it’s down. Most wind up selling winners because it feels good to lock in a profit. They mindlessly hold on to losers.

The Swedish Investor recommends ignoring how the stock has performed up until that point and focus on how you think it will perform in the future. If you suspect it will be a loser, sell it just in case. You can always buy it back.

This bit of advice may be confirmation bias on my part, but it dovetails nicely with something I learned from Paul Craven. Paul says to ask yourself, if given a blank slate — a new portfolio with fresh money, would you buy the same shares again at the current price? If so, continue to hold. If not, you know what you have to do.

The Swedish Investor discusses the sunk cost fallacy in Part 2. Be sure to watch Part 1 as well. You’ll be glad you did.

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