Aug 2021

Dear Patrons


Once I went to watch a movie. The movie was terrible. After an hour, I said to my wife, “Come on, let’s go home.” She replied, “No way. We can not waste Rs.500 like this.” I wondered, “There is no reason to stay. The money’s already gone.” But finally I surrendered and quietly completed the movie.

This is the sunk cost fallacy at work – a thinking error!

A company was running advertising campaign for four months and had not met even one of its goals. The company wanted to scrap it. The advertising manager resisted, saying: “But we’ve invested so much money in it. If we stop now, it’ll all have been for nothing.” Another victim of sunk of fallacy. Had it been scrapped in time, entire team can start working on something productive. Example of Sunk Cost Fallacy.

Supersonic Concorde is a prime example of a government deficit project. This project consumed huge amount of investments just to fail and to be retired in 2003. They continued to invest enormous sums of money in it – if only to save face. Sunk cost fallacy at institutional level.

Investors frequently fall victim to the sunk cost fallacy. Often they pivot their decisions on buying prices. When the decision fails, normal reply is “I lost so much money with this stock, I can’t sell it now”. This is irrational. The buying price should play no role. What counts is the stock’s future performance. Ironically, the more money a share loses, the more investors tend to stick by it.

Important point to drive here. Many investors hinge their investment in Mutual Fund with long term sentiments. There may be good reasons to continue investing in something but beware of doing so for the wrong reasons. Rational decision making required to check whether the schemes considered as long term are really worth to remain invested for or not. No matter how much you have already invested, you have to keep putting those schemes to a test for their performance.