What is Sunk Cost Trap?
Definition of Sunk Cost Trap
Sometimes people stick to a product, service or an activity that doesn’t meet their expectations because they have already spent time and/or money on it.
Explanation of Sunk Cost Trap
For example, people sit till the end of a theatre performance even though they are not enjoying it; keep the clothes in their closet they don’t like to wear. This behavior is due the time and money they have already spent and cannot be reimbursed.
A person buys $2,000 worth of Company A’s stock in January. In December, its value has dropped to $1,000 even though the overall market and similar stocks have risen in value over the year. Instead of selling the stock and putting that $1,000 into a different stock that is likely to rise in value, he/she holds on to Company A’s stock, which in the coming months becomes worthless.