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“I will sell when I get back to my purchase price.” This is one of the most common things investors say about losing positions, and it is one of the most financially destructive commitments a person can make. It is the sunk cost fallacy in its purest form, and I see it everywhere, in the portfolios of retail investors, in conversations about stocks, and honestly, in my own past decisions before I understood what was happening.
Understanding the sunk cost fallacy is not just an academic exercise in behavioural economics. It is a practically important skill for anyone who owns individual stocks or even funds that have declined from their purchase price.
What the Sunk Cost Fallacy Actually Is
A sunk cost is a cost that has already been incurred and cannot be recovered. In investing, your purchase price for a stock is a sunk cost the moment the transaction is complete. The market does not care what you paid. The stock’s future price movement will be determined by the company’s future earnings, the broader market environment, and countless other factors, none of which include your personal purchase price.
The sunk cost fallacy is the cognitive error of allowing past costs to influence future decisions. In investing, this manifests as refusing to sell a losing position because doing so would confirm the loss, as if not selling somehow keeps the loss theoretical rather than real.
The loss, of course, is already real. The moment a stock declines from your purchase price, the economic loss exists regardless of whether you sell. The only question is what you should do going forward, and that question should be answered entirely on the basis of the stock’s future prospects, not on the basis of where you bought it.
The I Will Sell When I Break Even Trap
The break-even trap is a specific and extremely common manifestation of the sunk cost fallacy. An investor buys a stock at Rs 500. The stock falls to Rs 300. Instead of evaluating the stock on its merits at Rs 300 and deciding whether to hold, buy more, or sell, the investor commits to a different strategy: hold until the stock returns to Rs 500, then sell.
This strategy is irrational for several reasons. First, it treats the original purchase price as a target price for the stock, but the stock’s fair value has nothing to do with what you paid for it. Second, it ignores the opportunity cost. The capital sitting in this underwater position could be deployed elsewhere. Waiting for a stock to recover from Rs 300 to Rs 500, a 67% gain needed, while a different stock might have easily returned 20-30% in the same period is an expensive inaction. Third, and most perversely, the break-even commitment sometimes causes investors to buy more of a declining stock to average down their cost, increasing their exposure to an investment thesis that may already be broken.
How Ego Compounds the Problem
The sunk cost fallacy is bad enough on its own, but it is typically compounded by ego. Selling a losing stock requires admitting that you were wrong. For many investors, this psychological cost, the hit to self-image that comes with acknowledging a poor decision, is more painful than the financial loss itself.
This is particularly true for stocks that were bought on the basis of strong personal conviction, extensive research, or public recommendations. The more publicly committed you were to an investment idea, the harder it is to change your mind, because changing your mind feels like a public admission of failure.
Experienced investors develop what I would call intellectual humility about their own decisions, the ability to evaluate whether their original thesis still holds without it being about whether they were right or wrong as a person. This is a learnable skill, but it requires deliberate practice and usually a few painful experiences of holding on too long first.
The Right Question to Ask
The single most important reframe in dealing with losing positions is to ask the right question. Instead of “should I sell this position that is down 40%?”, ask: “If I had no position in this stock and the same amount of cash available, would I buy this stock today at today’s price?”
This question cleanly separates the sunk cost from the forward-looking decision. It forces you to evaluate the stock at its current price, based on its current and future prospects, without the emotional anchor of your purchase price.
If the answer is yes, if, evaluated on its merits today, you would choose to buy this stock, then holding makes rational sense. If the answer is no, if you would not buy this company today at this price, then the only reason to hold is emotional, and that is not a good reason.
This question also forces a useful exercise: actually updating your analysis of the company. Often, when investors re-examine why they bought a stock in the first place and whether those reasons still hold, they find that the investment thesis has fundamentally changed. The sector dynamics shifted. The management team changed. A competitive threat emerged. Recognising this clearly often makes the exit decision obvious.
Tax-Loss Harvesting: A Rational Response to Losing Positions
One concrete, practical tool for dealing with losing positions in a rational way is tax-loss harvesting. In India, short-term capital losses can be set off against short-term capital gains, and long-term capital losses (on listed equity held for more than one year) can be set off against long-term capital gains. Losses that cannot be set off in the current year can be carried forward for up to eight assessment years.
This creates a genuine financial benefit to realising losses on positions that no longer belong in your portfolio. If you have a stock down 35% that you should exit based on your updated analysis, doing so before the end of the financial year allows you to use that loss to offset gains elsewhere in your portfolio, reducing your tax liability.
Tax-loss harvesting reframes the act of selling a losing position. Instead of being an admission of failure, it becomes a deliberate financial planning action. This reframing can make it emotionally easier to do the right thing, which is sometimes what you need.
For those who want to understand the broader emotional patterns that lead to holding bad positions, my article on why you always buy at the top and sell at the bottom provides complementary context on how cognitive biases affect investor decision-making at every stage.
Investment Journaling as a Tool for Breaking the Pattern
One of the most underrated practices in investing is keeping a written record of your investment decisions, specifically, writing down your thesis at the time of purchase, the conditions under which you would exit, and your ongoing assessment of whether the original thesis still holds.
A journal entry at the time of purchase might look like: “Buying this company because I believe the new management team will improve margins over the next two to three years. The target price is based on 20x earnings on my estimate of FY26 EPS. I will exit if margins do not show improvement by the end of FY25, or if the management team changes again.”
This kind of structured thinking does several things. It forces clarity at the time of entry, which immediately filters out many FOMO-driven purchases. It creates explicit exit conditions that are based on the investment thesis rather than the stock price. And when you review it later, it gives you an objective record to compare against current reality, making it much harder to unconsciously shift your thesis to justify continuing to hold a position that no longer deserves to be held.
The most common form of thesis drift I see is when investors who bought a stock as a short-term trade watch it decline, decide it is now a long-term investment, and then hold it for years waiting for a recovery. The journal prevents this by anchoring you to what you actually said when you bought it.
The most powerful question you can ask about any losing position is: would I buy this stock today, at today’s price, with no regard for what I paid?, if the honest answer is no, that is your exit signal, not the price getting back to your cost.
For investors who want to understand how frequent portfolio monitoring interacts with these emotional patterns, my article on why checking your portfolio every day is bad for your wealth is worth reading alongside this one.
Disclaimer: This article is for educational purposes only and does not constitute financial advice. Please consult a SEBI-registered advisor before making investment decisions.