Don't Fall for Sunk Cost Fallacy, a “Toxic Relationship” in the Investment World

Sunk Cost in accounting are costs that have been incurred for a business and cannot be recovered in the present or future.

The term Sunk Cost Fallacy has emerged in the investment world as a logical fallacy when a person continues to invest in a particular instrument even though it is no longer profitable. They are reluctant to stop because they feel they have already spent a lot of money, even though leaving the investment is clearly more profitable.

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Sunk Cost Fallacy in Stock Investment

This can happen to stock investors if they do not evaluate their portfolio regularly, especially with strong fundamental analysis. When asset values constantly fall, they just hope for a recovery without any effort to minimize risks and losses.

That's where it's important to readjust your investment strategy as economic conditions and financial goals change. Don't stick to just one strategy that may be outdated and irrelevant.

Is Avoiding Sunk Cost Fallacy Contrary to Dollar Cost Averaging (DCA) Strategy?

Avoiding the Sunk Cost Fallacy is done by not continuing to increase investments in assets with poor fundamentals despite having spent a lot of money in the past.

Otherwise, DCA encourages regular investment based on fundamental analysis along with the setting of time limits and stop-losses, not as an attempt to ‘save’ investments that have already failed.

In other words, the DCA strategy will become healthier and more rational if accompanied by a good fundamental evaluation. Any additional investment is based on future prospects instead of emotions related to past costs.

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Disclaimer: The content is made for educational purposes, not a recommendation to buy or sell a particular stock. PT KAF Sekuritas Indonesia is licensed and supervised by the Financial Services Authority (OJK).