Sunk Cost Trap

AAA

DEFINITION of 'Sunk Cost Trap'

The tendency of people to irrationally follow through on an activity that is not meeting their expectations because of the time and/or money they have already spent on it. The sunk cost trap explains why people finish movies they aren’t enjoying, finish meals that taste bad, hold on to investments that are underperforming and keep clothes in their closet that they’ve never worn. The sunk cost trap is also called the Concorde fallacy after the failed supersonic Concorde jet program that funding governments insisted on completing despite the jet’s poor outlook.

INVESTOPEDIA EXPLAINS 'Sunk Cost Trap'


Individuals, businesses and governments fall into the sunk cost trap when they base their decisions on past behavior and a desire to not waste the time or money they have already spent, instead of cutting their losses and making the decision that would give them the best outcome going forward. People are reluctant to admit, even to themselves, that they have wasted resources on a past decision. Changing directions is viewed, perhaps only subconsciously, as admitting failure. As a result, people tend to stay the course or even invest additional resources in a bad decision in a futile attempt to make their initial decision seem worthwhile.
 
Here is an example of the sunk cost trap in action:
 
Jennifer buys $1,000 worth of Company X’s stock in January. In December, its value has dropped to $100 even though the overall market and similar stocks have risen in value over the year. Instead of selling the stock and putting that $100 into a different stock that is likely to rise in value, she holds on to Company X’s stock, which in the coming months becomes worthless.
RELATED TERMS
  1. Relativity Trap

    A psychological or behavioral trap that leads people to make ...
  2. Superiority Trap

    A psychological or behavioral trap that leads people to believe ...
  3. Sunk Cost Dilemma

    A formal economic term that describes the emotional difficulty ...
  4. Poverty Trap

    A mechanism which makes it very difficult for people to escape ...
  5. Behavioral Finance

    A field of finance that proposes psychology-based theories to ...
  6. Bear Trap

    A false signal that the rising trend of a stock or index has ...
Related Articles
  1. Active Trading Fundamentals

    4 Psychological Traps That Are Killing Your Portfolio

    Sometimes your largest financial hurdle is our head. Learn about the common mind-traps that trip up investors.
  2. Investing Basics

    Avoid These Common Investing Psychology Traps

    There are a number of very common psychological traps or errors that investors typically make. You can save a lot of money and misery by avoiding them.
  3. Investing Basics

    Modern Portfolio Theory vs. Behavioral Finance

    Modern portfolio theory and behavioral finance represent differing schools of thought that attempt to explain investor behavior. Perhaps the easiest way to think about their arguments and positions ...
  4. Active Trading Fundamentals

    3 Psychological Quirks That Affect Your Trading

    There are human tendencies that can block the road toward achieving our financial goals. Here's how to get around them.
  5. Investing Basics

    Psychological Coping Strategies For Handling Losses

    There are a variety of psychological strategies for coping with financial losses and investing mistakes.
  6. Economics

    How To Recognize Sunk Costs

    Find out about sunk costs and why "getting your money's worth" can cost you more than you think.
  7. Active Trading Fundamentals

    An Introduction To Behavioral Finance

    Curious about how emotions and biases affect the market? Find some useful insight here.
  8. Options & Futures

    How To Read The Market's Psychological State

    Discover what on-balance volume, accumulation/distribution and open interest can tell you about the market mood.
  9. Savings

    6 Psychological Traps That Make You Spend

    If you're finding it hard to stick to your holiday budget, you're not alone. Find out what retailers do to weaken shoppers' resolve.
  10. Active Trading Fundamentals

    Leading Indicators Of Behavioral Finance

    Discover how put-call ratios and moving averages can be used to analyze investor behavior.

You May Also Like

Hot Definitions
  1. Christmas Tree

    An options trading strategy that is generally achieved by purchasing one call option and selling two other call options at ...
  2. Christmas Club

    A short-term savings account that usually pays out the full account balance to its account holders once each year, right ...
  3. Boston Snow Indicator

    A market theory that states that a white Christmas in Boston will result in rising stock prices for the following year. For ...
  4. Christmas Island Dollar

    The former currency of Christmas Island, an Australian island in the Indian Ocean that was discovered on December 25, 1643. ...
  5. Santa Claus Rally

    A surge in the price of stocks that often occurs in the week between Christmas and New Year's Day. There are numerous explanations ...
  6. Commodity

    1. A basic good used in commerce that is interchangeable with other commodities of the same type. Commodities are most often ...
Trading Center