Main Takeaways

  • This is the third installment of Thinking Through Ups and Downs – a blog series that explores the psychological patterns that influence trading behavior.

  • Anchoring bias causes traders to cling to arbitrary price points while sunk cost fallacy leads them to staying in losing positions, making exiting a bad trade challenging.

  • To stay objective, define your exit before entering a trade, use stop-losses, track your decisions with a trade journal, and ask questions like: Would I still buy this today?

Suppose you bought a token at $50 but now it’s barely holding at $20. Instead of reassessing your position, your mind keeps drifting back to that original price. You tell yourself it’ll bounce back – after all, you did your due diligence, committed funds, and believed in the project.

If this sounds familiar, you’re not alone. In this edition of Thinking Through Ups and Downs, we explore how anchoring bias sets a stubborn reference point, and how the sunk cost fallacy adds fuel to the fire – making it even harder to walk away from a losing trade. We’ll break down the psychology behind these mental traps, how they play out in crypto, and how to break the cycle before it costs you more.

The Psychology of Holding On Too Long

Blame the wiring, not the willpower. The tendency to hold on to losers too long isn’t merely personality – it’s hardwired, often driven by anchoring bias and the sunk cost fallacy.

Anchoring bias sets the trap. It happens when we latch onto an initial reference point – like the entry price of an asset – and treat it as a benchmark, even when circumstances change. This fixation can prevent objective reassessment, as new information is filtered through the lens of that original number.

Then, sunk cost fallacy reinforces the hold. Once we’ve invested time, money, or energy into something, letting go feels like waste. These instincts are wired into us as we’re taught that quitting is failure and persistence is virtue – so we keep going, overriding rational evaluation even when a fresh start would serve us better.

Once time, money, or effort has been invested, we feel pressure to stick with the decision — not because it still makes sense, but because abandoning it would mean accepting that those resources are gone. This emotional attachment to past investment can override rational evaluation.

Together, these biases reinforce each other: one clouds our judgment about value, the other makes it harder to walk away. This irrational commitment results in an inability to exit bad positions – which means smaller mistakes are allowed to grow into larger losses.

A Crypto Case Study

Imagine you bought a token at $50. Over the next few weeks, it drops to $42,  $35, then $20. You try to stay calm despite the decline: “I’ll go back up! It was at $50 before, so it has to rebound.” That’s anchoring bias at work – your brain fixates on your original entry point so strongly that it overrides the discipline to reassess your position, even when market conditions or fundamentals have clearly changed.

Perhaps you start to realize the fundamentals have shifted. You begin re-evaluating the position, and for a moment, cutting your losses feels like a rational move. 

Right on cue, that familiar inner voice pipes up – sly, persuasive: “But think of everything you’ve already put in.” Suddenly, selling feels like a waste, a betrayal. That’s sunk cost fallacy. It turns past effort into justification, pulling you away from logic and toward emotional reasoning. Your conviction is no longer grounded in data but in the weight of what you’ve already spent.

Anchoring bias planted the seed, and now the sunk cost fallacy waters it. Together, they loop and shackle you in – hoping for a recovery that may never come. What started as a strategic trade slowly turns into a stubborn attachment, even as it drifts further from your goals or the reality of the market. The emotional weight of past choices makes it harder to exit, even when the logic is clear. Ironically, the longer you hold on, the deeper the losses may become.

Walking Away from Losers

The first step to avoiding bias-driven decisions is to define your exit before you even enter a trade, removing guesswork when emotions inevitably rise. Trading psychology expert Mark Douglas emphasizes the importance of accepting risk before entering a position, mentally preparing yourself for all outcomes. One way to do this is to pre-commit to your stop loss. Tell yourself: "If this trade hits my stop, I'm completely at peace with that outcome." This kind of pre-commitment helps reduce the emotional temptation to move stops during market fluctuations.

If you think you might hesitate in the heat of the moment, consider using stop-loss orders to automate your exit and help you stay disciplined. By planning your exit in advance and sticking to it, you stay anchored in logic – not emotion – even when the market gets turbulent.

Keeping a trade journal can also sharpen your decision-making. Record why you entered the position, what you expected, and how things unfolded. Over time, this practice helps reveal patterns in your thinking and separates solid strategies from emotionally driven choices.

It’s just as important to recognize when cognitive biases begin to influence your decision. If you find yourself thinking, “I’ve already put so much in,” pause. That’s the sunk cost fallacy talking. Ask yourself: Does this trade still align with my goals today? If you catch yourself thinking, “It’ll bounce back to my entry price,” that’s anchoring bias. Instead, ask: What does the current data say about its outlook?

A quick mindset check can also help: Would I still buy this asset today? If the answer is no, it’s a sign that bias may be guiding your decision – and it's time to consider letting go.

Most importantly, give yourself permission to let go. Exiting a bad trade isn’t failure – it’s a smart, strategic move. Cutting losses early protects your capital, preserves your mental energy, and frees you to focus on better opportunities ahead.

Final Thoughts

In volatile markets, clarity is currency. The sunk cost fallacy and anchoring bias are subtle – they often feel rational, even noble. But left unchecked, they can quietly tether you to trades that no longer align with your goals.

The best traders aren’t the ones who never lose, they’re the ones who know when to move on. They recognize when a position no longer makes sense, resist the emotional attachment of past decisions, and make choices based on current realities.

Further Reading


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