How the “Sunk Cost Fallacy” Keeps You in Bad Relationships
And how to recover.
I spent a lot of years working on Wall Street. It was the perfect place to watch people and how they behave.
I remember one client in particular. He loved a certain stock, an asian paper company. He held a huge position already and every time that stock price dipped, he bought more.
On Wall Street, they call that dollar cost averaging. You own 100 shares at a cost of $50 per share. The stock dips to $40 and you buy 100 more. Now you own 200 shares at an average cost of $45. It is a good idea if that stock is solid and likely to increase in value.
But what this guy did was insane. He bought more at $45. Then at $35. And $25. And down and down and down. It hit $1 per share and he doubled down. He bought 90,000 shares at $1.
And then it got very ugly. That stock slid all the way down until it was worth a penny a share. It was not even worth the paper it was printed on.
How We Fall For It
In economics, it is called the “Sunk Cost Fallacy”. Throwing good money after bad. We like to think of ourselves as rational beings. But in fact, we make decisions all the time that have no basis in reality.
