Updated: December 8, 2021
Listen to this episode:
Summary of Episode 22:
A pizza story. (1:23)
A sunk cost trap or a sunk cost fallacy when a person is failing to see the best outcome because they have a bias resulting from a previous or ongoing commitment. (3:05)
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An illustration of the principle of loss aversion. (6:57)
Mentioned study: The Prospect Theory by Kahneman and Tversky
A stock market scenario. (10:13)
What does loss aversion have to do with the sunk cost trap? (11:30)
The sunk cost trap explains why people finish movies they are not enjoying, finish meals that taste bad, keep clothes in their closet that they’ve never worn, stay in bad relationships, and hold on to investments that are underperforming. (14:01)
Don’t be afraid to cut your losses and move forward, see the true potential of each choice you have, and decide based on what will make you more wealthy, healthy, and happy. (14:54)
GUILTY, I am. Somehow, a paper loss does not “feel” like a loss. I am sure all new traders have experienced this. Later on when I harnessed the power of options trading, I learned some repair strategies and wow, I thought the world was mine to conquer. I was able to repair a few trades but then learned a very valuable lesson. Some trades are simply not worth your time and effort to work at digging yourself out of the hole. So yes, there is a time to let go and move on.
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