Town Builders

Block 19: The Sunk Cost Bias

This last bias is the one where you keep fixing that thing because you’ve already put so much time into it. Sure, perseverance pays off but sometimes it’s a better idea to change your course. If the only reason you are persevering is because you can’t get over the time and effort you put in, then you are falling prey to sunk cost bias.

 

This can play out in a couple ways as an investor. For one, you could be researching a stock and let’s say you spend 10 hours researching it, then you find something wrong with the company. Are you okay moving on and not worrying about that “wasted 10 hours?” Those 10 hours are a “sunk-cost”, meaning they should have no bearing on your decision; the decision should be based on the quality of the company.

 

Second, a lot of people hold onto bad companies simply because they own them in their portfolios. Placing a higher value on something just because you own it is called the endowment effect. It’s a real thing! The fact that you bought shares in a company should be irrelevant. The question you should ask yourself is: would I still buy this company now? If the answer is no, move on…And moving on we are…Ever higher!