Sunk Cost Fallacy
The error of continuing an investment because of past spending rather than evaluating future prospects on their own merits.
What is Sunk Cost Fallacy?
The sunk cost fallacy occurs when investors continue holding or adding to a losing position because of the money already invested, rather than objectively evaluating whether the investment makes sense going forward. Sunk costs — money already spent and unrecoverable — should be irrelevant to future decisions; only expected future cash flows matter. In investing, the fallacy manifests as refusing to sell a losing stock because 'I've already lost so much,' averaging down into a deteriorating business, or holding an underwater position to 'get back to even' rather than redeploying capital to better opportunities.
Example
An investor buys shares of a company at $80. The stock falls to $40 as the company's competitive position deteriorates. Rather than objectively evaluating whether the business is worth holding at $40, the investor says 'I can't sell now — I'm down $40 per share.' This sunk cost thinking ignores the fact that the $40 paper loss is already gone regardless of future action; the only relevant question is: is the stock likely to outperform alternatives from $40?
Source: Investopedia — Sunk Cost Fallacy