Sunk Cost Fallacy is Your Biggest Investing Error

There are tons of mistakes that can be made when it comes to investing, and the most prominent one that I found not only in myself but in many others that I spoke with over the years is this exact one that I’m going to be telling you in this video. It’s so detrimental; I’ve seen people lose their entire investment due to this single behavioral trait. Without further ado, let’s get right to it.

Welcome! If you’re new to the channel, welcome. My name is Matt Jimenez. I’m an entrepreneur who has worked with the greatest minds over the last several years, and I’m here to pour into you guys everything they’ve poured into me. In this video, I want to make sure that you guys don’t ever fall into this trap, as it’s more likely to happen to those people who are looking for an investment to potentially change their lives or have an amazing return on. When the perceived value of an investment becomes your identity, you may fall victim to this very exact trait that I’ve fallen victim to before, and many others like myself. And this trait is called the sunk cost fallacy.

What is Sunk Cost Fallacy? Fallacy, and I call it a trait because it’s something that we do as humans, whether we want to or not. And if you’ve never heard what the sunk cost fallacy is, let me break it down to you quite simply. The sunk cost fallacy is a cognitive bias that occurs when people make a decision based on the amount of effort, time, and/or money that they’ve invested in a particular vehicle or endeavor. And due to the amount of time, money, and/or effort that they’ve put into this single investment, they end up discrediting the current circumstances in hopes for future circumstances that they want. Unfortunately, in doing so, they create a bias around this investment, which ends up always leaving them the last person to recoup any potential loss and substituting it for a far greater loss due to the sunk cost fallacy.

Now, this bias tends to happen a lot to entrepreneurs because as entrepreneurs, we always want the most bright and prosperous outcome in the future. So, we will often discredit the now in hopes for a better future. Unfortunately, this puts us into the category of developing cognitive dissonance from actual information and plotting us into the confirmation bias of things that we only want to hear to validate why something may work. And quite frankly, that only breeds a closed-minded individual. You must remain open-minded because the openness in your mind will allow you to pivot and function in the most logical, thought-out, methodical way for your most desired outcome. If your desired outcome is to receive X amount in future profits, understanding where you are currently will allow you ultimately to receive what you originally invested for, which is the profits.

But entrepreneurs are people who tend to ignore outside information or any opposing information. That’s why we get bunched into those groups because we don’t want anything to infringe on our idea of a prosperous future. Now let me give you an example of this in my own story, and then I’ll give you a couple of other examples of how it could happen to other people quite easily, actually.

Now, in my own story, back in 2016, 2017, I got heavily involved in the cryptocurrency markets. Not to say that I’m still not, but back then I was far more interested, also far more invested, not only monetarily but with my time. I put all my efforts and time into protecting my assumptions, a particular cryptocurrency project that I thought was going to make me the millionaire that I originally thought I would become through the investment. And what happened is the sunk cost fallacy started to creep in. I had a cryptocurrency that I held for many years, and it had a magnificent run and it made me tons of money. But due to the assumption that I thought it would go much further, I actually never received the max benefit from that bull run. In fact, I actually donated most of it back to the market due to this exact thing that I’m talking about: the sunk cost fallacy.

And the reason I never reaped the benefits of investing early and holding long-term was because I would always say, “It’s going to go further to the upside. As it goes down more, it’s just a little correction.” As it goes down more, I kept justifying the now in hopes for the prosperous future that I assumed would happen. And unfortunately, my validation was, “I already invested x amount, I can’t let it go. I already invested x amount of time, I can’t give up. I already talked to so many people on why it would work, that I cannot let them down, nor can I let myself down,” even though I have absolutely no impact on what an asset does. The only thing that I can influence and have an impact on is my decisions. But the sunk cost fallacy will not allow you to make the most appropriate decisions due to those exact factors. You see, as humans, whenever something is ours, we deem it to be a lot more valuable. For instance, if I had this shirt and someone else had this shirt, I would most likely price mine higher than theirs because it’s mine. We value our own things, and that’s the same thing with our ideologies and things that we are invested in. We hold them to much higher regards and anything opposing our investment or our items, we tend to discredit regardless. All the alarming news that was telling me to get out, cover your profits, and take what was on the table, I ignored it all. I created a confirmation bias, which means I only listened to things that would confirm my bias of it going higher, and I would discredit anything outside of my bias. Also, this bred the first grounds of cognitive dissonance. I would actually make sure that I was distant from any information that would infringe on what I set out to have, which was a portfolio of x amount of millions on this one particular investment. And that’s only because of all the effort, time, and money that I already had sunk into this investment. And it trapped me as an individual. And this is why I’m making this video, so you guys do not fall into that trap because it is so evident when it comes to entrepreneurs because we are so motivated, and we’re so disciplined that we don’t ever really give up, even when the most logical thing to do is actually change course. Changing course will allow you to correct this mishap from happening.

Another sector where I see it more evident than ever is in the real estate sector. So, let me give you an example. I’m going to use myself as the example instead of making an imaginary person. Let’s say I found a house, and I wanted to do a fix-and-flip project on this house. And the perceived value of the house would have given me a double on my money. So, I know if I buy this house for $100,000, I could sell it for two, and boom, I got a double on my money. But I know that it needs about $50,000 worth of work. So, in my head, I know that I’ll hit a double on my money, but I have to invest at least $50,000 in renovations just to make this value of the house in the $200,000 region.

Now let’s say I go ahead, I do the paperwork, and I’m now putting my time and effort into making the deal happen. The deal happens, and now I’m investing even more money, which is putting me into that sunk cost zone. So now I’m getting monetarily invested and also physically invested with my time and my presence and my attention. So as I feed the money and as I feed the time and the effort, the further I go into the sunk cost fallacy, especially when opposing data comes out. So let’s say now I’m $150,000 into this house, I’m doing the renovations, and there are other things that need to be fixed. So I actually need to invest more money into the house to get the renovations to get it to the valuation of $200,000. Let’s say I’m at $170,000 in the hole just to make this house work. But I’m committed, I’m invested, and I actually am more invested.

The funny thing about putting money into something is it makes you more invested. This is why free things are actually not what you want because whenever something is free or whenever there’s a lower barrier to entry on a particular thing, you tend to not value it as much because you’re not really that invested. For instance, if I told you you could get this thing for a dollar, you may not pay attention to it. But if I said you can get this thing for $1,000, you may pay attention a bit more because of the money tied to it and it’s a bit of an investment for yourself. But if I said it was $10,000, now you’re fully committed, and now your full attention is on that. So the more that you invest, the more you become invested.

Now, with that being said, I have now become more invested in this home to make it work because not only have I invested more money, I’ve invested more time on the renovations and all the efforts to make it so. And let’s say data comes out saying the neighborhood has tons of crime rate, and actually, the whole comps in the neighborhood have dropped drastically. No house has been valued at $200,000, and the average cost in this neighborhood is only $90,000. So now, in my head, I’ve built a whole future on the assumption that my house will be $200,000, especially because the word “my” is in front of it because it’s mine. So I value it more.

Now, I will start to discredit all the opposing information coming in just to confirm my bias. This is how the confirmation bias is developed. I will only confirm people and things and information to validate this $200,000 price point even though everything around me that’s logical is telling me the opposite. I’m ignoring it just because of the hopes of a brighter future. Now I’m a victim to the sunk cost fallacy, and that’s just another example. You could put this into any sector of your life, whether it’s personal fitness, health, reading, and many other things. For instance, let’s say you pick up a book, and you’ve already invested X amount of hours into it. You might as well just finish the book because you’ve already invested time. But the smarter thing to do would be to pivot to a book that is far more intriguing because you will reap way more rewards and in fact, spend less time on the book you don’t like, which is actually giving you back time that is more valuable to you because now you’re spending it on a book that you like most.

So if you find yourself in an investment where you’re constantly having to confirm your own bias and constantly distancing yourself from any information that’s opposing it, you might end up a victim of the sunk cost fallacy. It is better to cut your losses short and move on to something that could replenish those losses far quicker than doubling down on the thing that already occurred a loss for you. Now, of course, there are some discretions and caveats, and that’s where effort and due diligence come into all the decisions you must make. But you must always have an open mind. A closed mind will never reap the benefits to the fullest capacity. And when it comes to investing, the number one rule is to not lose money, as Warren Buffett says. The second rule is to make money. So if you’re already at a loss, you need to assess, is it even worth it? And what is the data showing? Is this thing really worth doubling down, investing more, putting more time and effort? Or am I better off getting rid of that asset and finding something that is far more lucrative and far more promising to replenish the losses on the first one? Chances are the second option is far better of a choice for yourself. And it’s something that I wish I told myself many years ago and in fact, something that I’m doing to replenish the losses that I had in my previous years is actually pivoting. And what I pivoted to is trading algorithms, utilizing software to trade for me. And in fact, I am on track to replenish everything that I lost in the previous years. And if you’re curious about the software that I’m using to do so, the link is down below. And if you’re curious how well it’s doing, I have a whole series where I track $50,000 in this account, and it’s doing exceptional. And in fact, I’ve actually reached out to the community, and I’ve done a couple of community interviews up above. Click those, and you can see how other people are doing in this community utilizing this software. And if you enjoyed this video and you want to hear more tips and tricks when it comes to investing, leave a comment down below and leave a like. It makes me want to do these videos more than I already want to do.

Like always, my friends, peace.Please visit Sunk Cost Fallacy is Your Biggest Investing Error to watch the full video!

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