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Look... I invested twenty thousand euros into crypto. By December 2018 it was worth less than five thousand. So I bought more. Not because I did not understand the market. I understood the market fine. What I did not understand was myself. There is a name for what I was doing. Economists call it the sunk cost fallacy. But the textbook explanation stops too early.
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Not financial advice. For educational purposes only. I am not a financial advisor. Always do your own research and consult a qualified advisor before making any investment decisions.
Look... I invested twenty thousand euros into crypto. By December 2018 it was worth less than five thousand euros. 75% gone. And my response was to buy more.
Not because I did not understand the market. I had read the research. I understood volatility. I understood that past investment is not a reason to continue investing. What I did not understand was myself.
"Selling did not just mean losing twenty thousand euros. Selling meant becoming a person who lost twenty thousand euros. That is the real trap."
Look... the sunk cost fallacy is the tendency to continue investing in something — money, time, effort — because of what has already been spent, rather than because of what the future prospects actually are. It was formally documented by Arkes and Blumer in 1985. Their research showed that people consistently allowed past investment to influence future decisions, even when they knew rationally that past costs were irrelevant to future outcomes.
The textbook explanation says: the brain hates waste. Selling at a loss feels like confirming the waste. Holding — or buying more — feels like refusing to accept the loss as final. That explanation is true. But it is not deep enough.
Look... the real trap is not about the money. It is about identity. When I invested twenty thousand euros in a position and watched it fall to five thousand, selling was not just a financial decision. Selling meant becoming a person who had lost fifteen thousand euros and done nothing to recover it. It meant updating my self-image from someone who had made a bold investment to someone who had made a costly mistake.
Holding — or buying more — kept that identity transition at bay. Every additional purchase was a vote for a future version of the story where I was right. This is what I call the loyalty tax. You stay loyal to a position, a coin, a version of yourself — and you pay for that loyalty with money you will never recover.
Barry Staw's 1976 research on escalation of commitment showed this pattern in organisational contexts: people who made decisions and saw them fail were more likely to double down than people who had not made the original decision. The original decision created an identity stake that made reversing it feel like a personal failure rather than a rational adjustment.
Three bodies of research converge on this phenomenon:
Look... the question that finally worked for me was this: if I did not already own this position, would I buy it today at this price, with this information? If the answer is no — and it almost always is when you are holding a losing position — the only rational reason to hold is the sunk cost. And sunk costs are not a reason.
What is the sunk cost fallacy?
The sunk cost fallacy is the tendency to continue a course of action because of prior investment, rather than based on future prospects. Formally documented by Arkes and Blumer in 1985, it explains why people hold losing investments, continue failing projects and stay in bad situations because of what has already been spent rather than what the future looks like.
What is escalation of commitment?
Escalation of commitment is the tendency to increase investment in a failing course of action when that course of action was originally chosen by the investor. Documented by Barry Staw in 1976, it explains why decision-makers who chose a strategy are more likely to double down on it when it fails than external observers who did not make the original choice.
How do I avoid the sunk cost fallacy in investing?
The most effective technique is to ask whether you would buy the position today, at its current price, if you did not already own it. If the answer is no and your only reason for holding is prior investment, the sunk cost fallacy is likely influencing the decision. Separating the investment decision from the identity attached to it is the deeper work.