Have you ever developed an unhealthy attachment to something, clinging to it even though you knew it might be hurting you financially?
Most of us have. Eventually, you probably realized that you had hung on too long. In one way or another, everyone has done this because it's only human. One reason we hang on is because we've invested so much time, effort, money or all three.
With investing, this is all too common. Wanting to believe that we were justified in making an investment, we stay with it, even though the prospects of profit may now be dim.
In business and finance, this is referred to as "sunk costs" — those that you may never recover. Clinging to something solely because you've invested in it makes no sense. But this happens all the time. Behavioral economists call this the sunk-cost fallacy: Just because people have invested so much time or money, their faulty reasoning goes, they hang on to the investment no matter what.
Of course, this is often a recipe for loss — and it's a major factor affecting success in investing. Investors initially form a view of a stock's prospects based on something they've heard or read, and resist re-evaluating this move because they cling to the belief that they were right in the first place. Simply admitting they were wrong is difficult for many.