Two fallacies to avoid right now: Sunk Cost Fallacy and Recency Fallacy

[Collin Hays]

I hear from a fair number of folks that are ensnared by one of these two fallacies right now.

The first one is the "sunk cost" fallacy.  The sunk cost fallacy occurs when we feel that we have invested too much to quit. This psychological trap causes us to stick with a plan even if it no longer serves us and the costs clearly outweigh the benefits.

"We have invested too much in this to sell it now."  If the investment was a poor one, continuing to lose money on it is...just losing more money.  What you previously invested is irrelevant.  

Then there is the "recency fallacy".  This fallacy is a bias that favors recent events over historic ones.  Recency bias gives greater importance to the most recent event, such as the final lawyer's closing argument a jury hears before being dismissed to deliberate.

In 2021 and 2022, recency fallacy told us "keep buying short term rentals, because they have been going up and will continue to do so.  This time is different."  

Now that the market has turned rather south, recency fallacy tells us "short term rentals won't make money anymore, because they didn't this last year."  

When evaluating your investments, try to avoid these fallacies, as they can keep you sidetracked.