§ 01
| Sunk Cost Thinking | Rational Thinking |
|---|---|
| ‘I’ve already invested $50K, can’t sell now’ | The $50K is gone regardless. Only future returns matter. |
| ‘I’ve spent 100 hours researching this stock’ | Time spent doesn’t make the thesis right. New information should override old research. |
| ‘I’ll average down to lower my cost basis’ | Averaging down makes sense only if the thesis is intact. If fundamentals deteriorated, you’re just increasing exposure to a bad investment. |
| ‘Management promised a turnaround’ | Evaluate the turnaround on its merits, not on your desire for one. |
§ 02
Averaging down is the most common manifestation of sunk cost fallacy in investing. It feels rational (‘I’m getting a better price!’) but if the reason for the decline is fundamental deterioration, you’re doubling your bet on a losing hand.
§ 03
Look at your largest losing position. Ask: ‘If I had this cash instead of this stock, would I buy this stock today?’ If no, the only reason you’re holding is sunk cost.
§ 04
You bought a stock at $100 that’s now $40. A friend suggests a different stock at $40 with much better fundamentals. You say ‘I’ll keep mine — it has more upside back to $100.’ Is this rational?
§ 05
Five questions · AI feedback
Sit with the ideas.
You bought 1,000 shares of a tech company at $150 ($150K invested). It's now $60. The firm has $50/share in cash, is burning $5/share per quarter, and has no clear path to profitability. Should you average down at $60?
Why: