Concorde Fallacy

The Concorde Fallacy (also known as the Sunk Cost Fallacy) describes our tendency to continue an endeavor once an investment in money, effort, or time has been made. It’s the psychological trap that whispers, “You've come too far to quit now,” even when all rational signs point to stopping. This cognitive bias pushes us to make decisions based on past, unrecoverable costs—the sunk costs—instead of on future prospects. The name originates from the Franco-British supersonic passenger jet, the Concorde. Both governments continued to pour billions into the project long after it became clear it would never be commercially viable. They were driven not by the plane's future profitability but by the immense sums already spent, making it a monumental, high-flying example of throwing good money after bad. For investors, this fallacy is a portfolio's silent killer, convincing them to hold onto losing assets in the vain hope of recouping their initial investment, rather than redeploying their capital more productively.

The Concorde Fallacy isn't just a simple accounting error; it's rooted in powerful psychological drivers that are hard to overcome. Understanding these biases is the first step toward disarming them.

Humans have a deep-seated need to appear consistent. Once we commit to a decision—like buying a stock—we feel a psychological pressure to stick with it to justify our initial choice. Admitting we were wrong by selling at a loss creates cognitive dissonance, an uncomfortable mental state. To avoid this, we double down, convincing ourselves that our original thesis is still valid, a behavior often called Escalation of Commitment. We become emotionally attached to the investment, not because of its merits, but because it's our investment.

The theory of Loss Aversion, pioneered by psychologists Daniel Kahneman and Amos Tversky, shows that the pain of a loss is roughly twice as powerful as the pleasure from an equivalent gain. A sunk cost represents a potential loss. Selling a losing stock makes that loss real and painful. Holding on, however, allows us to live in a state of hope where the loss is still just “on paper.” We cling to the stock, waiting for it to reach our breakeven point, a price that is psychologically significant but financially irrelevant to the company's future.

In investing, mistaking a past cost for a future opportunity can be devastating. The market doesn't care what you paid for a stock; it only prices it based on future expectations.

This is the classic scenario. An investor buys “Innovate Corp” at $100 per share. The company then loses a key patent, and the stock plummets to $30. The investor, fixated on the $70 per share paper loss, refuses to sell. Their reasoning is not based on a new analysis of Innovate Corp's diminished prospects. Instead, they think, “If I sell now, I'll lock in a huge loss. I have to hold on until it gets back to $100.” The original $100 is a sunk cost. The rational question is: “With my $30 of capital per share, is Innovate Corp the best possible investment I can make in the market today?” If not, the money should be moved elsewhere.

The Concorde Fallacy can also fuel the dangerous practice of Averaging Down on a failing company. Believing they can lower their breakeven price, an investor buys more shares of a falling stock. While this can be a sound strategy if a great company hits a temporary snag, it's a value trap when applied to a business whose intrinsic value is genuinely deteriorating. The investor isn't making a fresh decision; they are reinforcing a past mistake, digging a deeper hole in the hope of finding a shortcut out.

Value Investing provides a powerful antidote to the Concorde Fallacy because its principles force a forward-looking, rational approach. Great investors like Warren Buffett live by the mantra, “The most important thing to do if you find yourself in a hole is to stop digging.”

A powerful technique to defeat this bias is the “zero-basis” approach. Review each stock in your portfolio and ask yourself this simple question: “If I had this position's value in cash today, would I buy this exact stock at its current price?”

• If the answer is a resounding “yes,” then holding is a rational, active decision.
• If the answer is “no” or even “maybe,” it's a strong signal that the Concorde Fallacy may be influencing you. The past purchase price is clouding your judgment about better future opportunities.

Every dollar tied up in a poor investment is a dollar that cannot be used for a great one. This is the concept of Opportunity Cost. A value investor constantly compares their current holdings not to their purchase price, but to the other opportunities available in the market. Is holding onto that stagnant stock for another year truly better than investing in a new, undervalued company with strong growth prospects?

Before you even make an investment, you can build a defense against future irrationality. A Pre-Mortem Analysis is a thought experiment where you imagine the investment has failed miserably a year from now. Then, you write down every possible reason for this failure. This exercise does two things:

1. It helps you identify weaknesses in your initial thesis.
2. It establishes clear “exit triggers.” If one of your “reasons for failure” actually happens, it becomes much easier to sell, as you have already rehearsed the logic for doing so, free from the emotional turmoil of a real-time loss.