The sunk-cost fallacy is the mistake of letting money, time or effort you have already spent — and cannot get back — drive a decision that should be about the future. In investing it sounds like "I cannot sell now, I am down too much." The money you already lost is gone either way; the only question that matters is whether owning the stock from here is a good bet.
A sunk cost is a cost you cannot recover no matter what you do next. Rationally it should be irrelevant to the choice in front of you — but it feels enormous, because selling would force you to admit the loss is real. So investors hold losing positions long past the point where they would ever buy them fresh, and often average down (buy more to lower their average price), pouring good money after bad to "make back" what they lost. That is the sunk-cost fallacy fused with loss aversion, and it is the engine of the disposition effect — holding losers too long.
Ask yourself: "If I did not already own this, and I had the cash today, would I buy it right now at this price?" If the honest answer is no, then holding it is the same decision as buying it — you are choosing this stock over every other use of that money. What you paid originally is not part of that question. Your cost basis is a tax fact and a psychological anchor, not a reason to hold.
Example (illustrative): you bought at $100 and it is now $60. The business has clearly deteriorated and you would not buy it today at $60 — but you hold, and even add at $60, because selling means "locking in" the loss and you want to get back to $100. The $40 per share is already gone. Decide the exit before you are underwater: a written invalidation level set when you are calm — or an automatic stop-loss — converts "I cannot sell at a loss" into a mechanical rule.
It is letting money you have already spent and cannot recover drive a decision that should only be about the future — such as holding a losing stock because you are 'down too much' to sell.
Ask: 'If I did not already own this and had the cash today, would I buy it now at this price?' If no, then holding is the same choice as buying, and what you originally paid is irrelevant.
Not always — adding to a position can be sound if you would buy it fresh today on its merits. It becomes the fallacy when the goal is to 'make back' the loss rather than because the bet is good from here.
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Educational research only — not investment advice.