The Sunk Cost Fallacy in Stock Investing

New Straits Times

10-07-2025

THE closing date for acceptance of the voluntary takeover offer by FGV Holdings Bhd majority shareholders for the shares that are not already owned by the offeror has been extended to Aug 15 from July 7.
Under the takeover offer launched on May 26, Felda is offering RM1.30 for each FGV share. FGV conducted one of Malaysia's biggest IPOs and it debuted in 2012 at RM4.55 per share and raised RM10.5 billion.
The share price of FGV has declined over the years. It would indeed be hard to stomach the prospect of accepting an offer of RM 1.30 if investors had invested at higher prices or the IPO price RM 4.55.
When it comes to making sound investment decisions, one of the most common cognitive pitfalls investors fall into is anchoring their expectations to the original purchase price of a stock.
This behaviour is rooted in human psychology but runs counter to rational financial decision-making. In reality, the price you paid for a stock is irrelevant in deciding whether to hold, sell, or buy more.
Instead, decisions should be based on future prospects, opportunity costs, and market fundamentals.
The Sunk Cost Fallacy
The core reason why the purchase price is irrelevant lies in a concept known as the sunk cost fallacy. A sunk cost is any cost that has already been incurred and cannot be recovered.
The price you paid for a stock is a sunk cost - whether you paid RM 10 or RM 20 per share, that money is gone. What matters now is what the stock is worth today and what it is likely to be worth in the future.
Suppose you bought shares of a company at RM10, and the price has since fallen to RM 6. Many investors would be reluctant to sell at a loss, thinking, "I'll wait until it gets back to RM10 so I can break even." But this thinking is flawed.
The fact that you paid RM10 has no bearing on what the stock will do next. If the company's prospects have deteriorated and the fair value is now RM 5, waiting to "break even" could result in even greater losses.
Rational Decision-Making: Forward-Looking Analysis
Investment decisions should be made with a forward-looking perspective.
The central question is: Given what I know today, what is the best use of my capital going forward?
Imagine you're holding a stock currently worth RM6. Whether you bought it at RM10 or RM20 is irrelevant. The rational approach is to assess whether this RM6 investment has better return prospects than any other available alternative.
If another opportunity offers a higher expected return with similar or lower risk, the logical move is to sell the current stock and reallocate your capital. The goal of investing is to maximize returns, not to recover past losses.
Opportunity Cost and Capital Allocation
Every ringgit you keep in a stock has an opportunity cost - it could be used to invest elsewhere. If you ignore this because you're fixated on your original purchase price, you may miss better opportunities.
For example, holding onto a poorly performing stock because you don't want to "lock in a loss" could prevent you from investing in a high-growth company with superior prospects.
Professional investors constantly re-evaluate their portfolios to ensure that every asset earns its place based on future return expectations. Past purchase price never enters the equation.
Behavioural Biases and Emotional Investing
The inclination to consider the purchase price is a form of anchoring bias, where investors fixate on a reference point (in this case, the buy price) regardless of its relevance. Emotional attachment can also cloud judgment.
After all, if you spent hours researching and bought a stock with conviction, admitting it was a mistake can be psychologically difficult.
However, good investors are humble and adaptive.
Recognising when your thesis was wrong, or when conditions have changed, is a sign of disciplined investing - not failure.
Conclusion
In investment decision-making, your focus must remain on the present value and future potential of each asset - not its historical cost. The price you paid for a stock is a sunk cost, irrelevant to whether you should buy, hold, or sell.
By letting go of anchoring and other behavioural biases, and instead focusing on opportunity costs and forward-looking analysis, you can make more rational, profitable decisions. Remember: the market doesn't care what you paid for a stock, and neither should you.