Real-world examples of sunk cost fallacy in investment decisions

The best real examples of sunk cost fallacy in investment decisions

Before talking theory, it’s more useful to look at how this actually shows up in portfolios. The best examples of sunk cost fallacy in investment decisions all share the same pattern: investors anchor on what they already spent and ignore what makes sense now.

You’ll notice a few recurring phrases:

• “I’ve already lost too much to sell.”
• “I’ve been in this for years; it has to turn around.”
• “I can’t waste all the fees I’ve paid.”

Each of these is code for: I’m letting sunk costs drive my choices.

Stock investing: holding losers just to “get back to even”

One of the most common examples of sunk cost fallacy in investment decisions is the investor who bought a stock at \(100, watched it fall to \)40, and refuses to sell until it gets back to $100.

The logic goes like this:

• “I’m not locking in a 60% loss. I’ll wait it out.”
• “The company was great when I bought it. The market is just overreacting.”

Maybe that was reasonable in 2009 for some high-quality names. But when the business fundamentals have changed—shrinking revenue, rising debt, disrupted business model—clinging to the original purchase price is pure sunk cost thinking.

A very real pattern showed up after the 2021–2022 tech and growth stock sell-off. Many retail investors held on to unprofitable growth names that were down 70–90%, not because the future looked bright, but because they had already lost so much. Surveys from 2023 by brokerage platforms and financial media showed a spike in “bag holder” stories: investors sitting on massive losses in meme stocks and SPACs, refusing to sell because they didn’t want to “waste” their original investment.

The rational question is not, “What did I pay?” It’s, “If I had cash today, would I buy this stock at this price?” If the answer is no, sunk cost fallacy is in the driver’s seat.

Crypto and meme stocks: doubling down to avoid admitting a mistake

Another vivid example of sunk cost fallacy in investment decisions came from the crypto and meme stock waves of 2021–2022.

Many investors bought tokens or meme stocks at euphoric prices. When prices collapsed, instead of reassessing the investment case, they poured in more money:

• “It’s down 80%—it’s a bargain now. I’ll average down.”
• “I can’t sell this far down; I’ll look stupid.”

In some cases, averaging down can be rational. But when the only real reason is emotional—refusing to admit the initial decision was poor—that’s sunk cost behavior. The original buy price and the hours spent on Reddit or Discord become psychological anchors.

Post-mortems by regulators and academics have highlighted how retail investors in meme stocks and speculative crypto often chased losses. For instance, the U.S. Securities and Exchange Commission (SEC) has repeatedly warned investors about speculative products and the risk of focusing on past losses instead of future risk and reward (sec.gov).

The sunk cost twist: people weren’t asking, “What is the realistic forward-looking return versus risk?” They were asking, “How do I get my money back?”

Real estate: holding a rental property that no longer makes sense

Real estate offers classic examples of sunk cost fallacy in investment decisions because the numbers are big and the emotional attachment is strong.

Imagine an investor who bought a rental condo in 2018 with a low mortgage rate and a solid rental yield. Fast forward to 2024:

• Local property taxes and insurance have soared.
• Maintenance costs are higher.
• Rents have plateaued.
• The net cash flow is now barely positive, or even negative.

Yet the owner refuses to sell:

• “I’ve already put $80,000 into renovations.”
• “I’ve owned this place for six years; it will feel like a waste to sell now.”

Those renovation costs are sunk. The closing costs from years ago are sunk. The only rational question now is: Is this property still the best use of my capital compared with alternatives?

With higher interest rates since 2022 and shifting housing markets, many investors are facing exactly this decision. Some are rebalancing out of underperforming properties into more diversified portfolios. Others are stuck, emotionally anchored by sunk costs.

Startups and private equity: “we’ve already put too much in to walk away”

Professional investors are not immune. A painful example of sunk cost fallacy in investment decisions shows up in venture capital and private equity.

A firm might invest in a startup that hits early milestones, then stalls. Revenue growth slows, the business model looks shaky, and competitors are pulling ahead. Objectively, the odds of a strong exit are falling.

Yet investors keep participating in follow-on rounds, not because the new data supports it, but because:

• They’ve already committed tens of millions.
• They want to avoid writing down the investment.
• They hope one more funding round will “give it a chance.”

This pattern isn’t hypothetical. After the 2021 startup funding boom, 2023 and 2024 saw a wave of “down rounds” and quiet shutdowns. Many funds had to decide whether to put in more money or walk away. In postmortems, some partners admitted they supported follow-on rounds mainly because they couldn’t stomach crystallizing a huge loss.

That’s sunk cost fallacy on an institutional scale.

Retirement accounts: clinging to high-fee funds because “I’ve had them forever”

A quieter, but very common, example of sunk cost fallacy in investment decisions shows up in retirement plans.

An employee might have held the same high-fee mutual fund in a 401(k) for 15 years. Over time, cheaper index funds became available in the plan. The rational move is to switch, but the investor hesitates:

• “I’ve paid loads and high expense ratios for years; it would be a waste to move now.”
• “This fund got me this far; I should stay loyal.”

The years of fees are gone. The only relevant comparison is: From today forward, is this high-fee fund likely to outperform a low-cost alternative after fees and taxes?

Research from sources like the U.S. Department of Labor highlights how even small fee differences can significantly reduce retirement balances over time (dol.gov). Staying in an expensive fund just because you’ve “already paid so much” is a textbook sunk cost problem.

Home renovations and personal finance: when lifestyle spending becomes an “investment”

Not every example of sunk cost fallacy in investment decisions shows up in a brokerage account. Sometimes it hides in personal finance decisions that people label as “investments.”

Consider a homeowner who starts a major renovation, expecting it to boost resale value. Costs spiral far beyond the original budget. The local market cools. The project no longer makes financial sense.

But the owner keeps pouring in money:

• “We’ve already spent $120,000; we can’t stop now.”
• “If we quit, all that money will be wasted.”

In reality, if continuing the project destroys more value than it creates, the rational move might be to scale back or even stop. The money already spent is gone either way. The decision should be based only on future costs and future benefits.

This same pattern appears in small businesses, side hustles, and even professional degrees. People keep investing in a failing project or course of study because they can’t bear the idea that past effort and money won’t “pay off.”

Why sunk cost fallacy is so powerful in investing

By now, the examples of sunk cost fallacy in investment decisions should feel uncomfortably familiar. So why is this bias so sticky, even for sophisticated investors?

Several psychological forces pile on each other:

• Loss aversion – As described in behavioral economics research by Kahneman and Tversky, losses hurt more than equivalent gains feel good. That pain pushes investors to avoid “locking in” a loss, even when holding is worse.
• Regret avoidance – Selling a loser forces you to admit you were wrong. Holding it allows you to cling to the story that it might still work out.
• Mental accounting – Investors mentally separate each position by its purchase price, instead of viewing all capital as one pool that should be allocated to the best opportunities.
• Identity and ego – For professionals, a bad investment can feel like a threat to competence or reputation. For individuals, it can feel like a personal failure.

Behavioral finance research, including work from institutions like Harvard Business School and other academic centers, has repeatedly shown that these biases lead to suboptimal portfolio decisions, such as holding losers too long and selling winners too early (hbs.edu).

How to avoid sunk cost traps in your portfolio

Knowing the theory is one thing. Avoiding the trap when it’s your money on the line is something else.

Here are practical ways to push back against the sunk cost pull:

1. Reframe every holding as if you were buying today
Once a quarter, look at each investment and ask: If I had this amount in cash today, would I buy this same asset at this price? If the honest answer is no, consider why you’re still holding it. If the only answer is “because I paid more for it,” that’s sunk cost talking.

2. Write an exit thesis up front
When you buy, write down:

• Why you’re investing
• What would make you sell (change in fundamentals, valuation, time horizon, etc.)

This turns decisions into a comparison between today’s facts and your original thesis, not between today’s price and your original purchase price.

3. Separate the loss from the lesson
A realized loss is tuition. The lesson is what matters. Investors who perform better over time tend to treat losses as data, not identity. Resources from organizations like the Financial Industry Regulatory Authority (FINRA) emphasize the value of reflection and education after investment mistakes (finra.org).

4. Automate parts of your decision-making
For some investors, predefined rules help:

• Rebalancing bands that trigger trimming winners and cutting losers.
• Maximum position sizes that prevent emotional doubling down.

Rules won’t remove emotion, but they reduce the room for sunk cost rationalizations.

5. Talk it out with a neutral third party
An advisor, investment committee, or even a disciplined friend can challenge sunk cost thinking. It’s easier for someone else to say, “Forget what you paid. Does this still deserve a place in your portfolio?”

Red flags that you’re stuck in a sunk cost mindset

You don’t need a spreadsheet to spot many real examples of sunk cost fallacy in investment decisions. Listen for these phrases in your own head:

• “I’ll sell when it gets back to my buy price.”
• “I can’t sell now; I’ve already put too much into this.”
• “It would be a waste to switch funds after all these fees.”
• “We’ve supported this company for years; we can’t walk away now.”

When you hear those, pause. Strip away the history and ask a clean question: Given what I know today, and the alternatives available, is this still the best place for this money?

That’s the antidote to sunk cost fallacy.

FAQ: examples of sunk cost fallacy in investment decisions

What is a simple example of sunk cost fallacy in investing?
An investor buys a stock at \(50. It falls to \)20. The business outlook has clearly worsened, but the investor refuses to sell, saying, “I’ll sell when it gets back to \(50.” The original \)50 is a sunk cost. The only relevant question is whether the stock is attractive at $20 compared with other options.

What are common real examples of sunk cost fallacy in investment decisions?
Common real examples include holding losing stocks just to “get back to even,” pouring more money into failing startups or small businesses, keeping a negative-cash-flow rental property because of past renovations, and sticking with high-fee mutual funds in retirement accounts because “I’ve had them for years.” In each case, past spending or effort drives the decision more than future risk and return.

Is averaging down always a sunk cost mistake?
No. Averaging down can be rational if the fundamentals are intact or improving, and the lower price genuinely offers better expected returns. It becomes sunk cost fallacy when the main motivation is emotional—trying to recover past losses or avoid admitting the initial decision was wrong.

How can I tell if I’m making an investment decision based on sunk costs?
Look at your reasoning. If you find yourself focusing on what you paid, how long you’ve held it, or how much effort you’ve put in, rather than on future prospects and alternatives, you’re likely falling into a sunk cost trap.

Do professional investors fall for sunk cost fallacy too?
Absolutely. Fund managers, venture capitalists, and corporate executives all face pressure to justify past decisions. That pressure can lead them to keep funding weak projects or holding bad investments long after the data says they should move on.

The bottom line: the best investors aren’t the ones who never make mistakes. They’re the ones who refuse to let yesterday’s mistakes dictate tomorrow’s decisions. Recognizing the many examples of sunk cost fallacy in investment decisions is step one. Step two is brutally simple, and very hard: ignore what you paid, and act based on what’s true now.