The Sunk Cost Fallacy: An Advice for Investors

Bengaluru is known as the Silicon Valley of India. ?Despite earning good money as software engineers, Manu and Somu, ?close colleagues, ?wanted to become supper rich by investing in the stock market. They spent countless hours studying charts, reading news, and analyzing trends. One sunny morning, their opportunity arrived when they stumbled upon a hot new tech stock, IGX.

Manu and Somu eagerly invested their hard-earned savings into IGX. They are convinced that the stock is the ticket to financial success and will make them supper rich. The stock soared in the early days, doubling their investments within weeks. Manu and Somu felt happy about the stock performance. But as the weeks turned into months, IGX stock began to fluctuate. It experienced periods of rapid growth followed by sharp declines. Manu and Somu found themselves in a dilemma. They had invested a substantial amount, and their emotions were entangled with their investments.

One evening, they met at their favorite restaurant, ?each nursing a cup of coffee and a troubled expression. Manu sighed. "I'm worried, Somu. IGX has been on a rollercoaster lately, but I can't sell now. I've put in so much already; I can't just walk away." Somu nodded, equally concerned. "I feel the same way, Manu. I've invested so much time and money that it seems foolish to give up now. We need to wait for it to bounce back."

?Weeks turned into months, and IGX stock continued its erratic behavior. Manu and Somu watched helplessly as their investment dwindled. Yet, they couldn't bring themselves to sell. They had fallen into the dreaded sunk cost fallacy trap. The sunk cost fallacy is a phenomenon whereby a person is hesitant to abandon a strategy or course of action as he/she has invested heavily in it. However, abandonment would be more beneficial. ??Thus, Manu and Somu believed that since they had already invested so much, they had to stay committed.

One fine day, ?an older investor and well-wisher of Manu and Somu, ?named Dr. Aditya overheard their conversation. Over the years, he had seen many investors fall prey to the sunk cost fallacy. Further, he said, "I couldn't help but overhear your dilemma. Let me share a piece of advice. ?The stock market is unpredictable. What matters is your current assessment of the stock's potential, not what you've invested in the past." ?Manu and Somu felt that the stock, IGX does not have potential and future growth.

Taking Dr. Aditya's advice to heart, Manu and Somu sold their IGX shares and diversified their investments. Over time, they recovered their losses and started making more informed decisions. Ultimately, the friends learned a valuable lesson about the sunk cost fallacy. They realized their investments should be based on current information and future potential rather than past commitments.

Note: This fictional story conveys the concept of sunk cost fallacy.