Playbooks / Behavioural
Sunk cost and the decision to sell
The rule
Nobody wants to sell at a loss. That reluctance is the most expensive habit in investing, and it is entirely about the past.
The test
Ask one question. If I did not own this, and I had the money it would release, would I buy it today at today's price?
If yes, keep it. If no, the only thing keeping you in the position is the price you paid, and the price you paid is gone regardless of what you do next.
That is the whole framework. Everything else is the reasons people find not to apply it.
Why it is so hard
The purchase price becomes an anchor, and selling below it converts a paper loss into an admitted one. Loss aversion makes that admission feel worse than the ongoing cost of holding, even when the ongoing cost is larger.
Property makes it worse than markets do. There is no daily price, so the loss stays theoretical for longer. Valuation is a matter of opinion, so a hopeful opinion is always available. And the transaction cost of selling gives a rational-sounding reason to defer a decision that has already been made emotionally.
The cost of holding, which is real
A property held for reasons of pride still charges you. The service charge continues, the mortgage continues, the maintenance continues, and the capital sits in an asset you have already concluded you would not buy.
That last part is the real cost: opportunity. Capital tied to a unit yielding two percent net, in a building you would not choose again, is capital not doing something better. The loss was incurred when the value fell, not on the day you accept it.
What the test does not mean
It is not an argument for selling whenever something falls. Applied honestly it will frequently say keep, because a sound asset in a soft market is exactly the thing worth holding through, and the drawdown recovery arithmetic favours patience for assets that still work.
The test separates two cases that feel identical from the inside. Holding because the asset is good, and holding because selling would confirm a mistake. Only the first is a decision. Once the decision is to sell, selling well is a separate skill from deciding to.
Doing it before you need to
The reason to write down your reasons for owning something at the time you buy it is that the reasons are available later, in your own handwriting, when the position has moved against you and your memory has become creative about what you originally expected.
That is the same discipline as an investment policy statement in the behaviour gap framework. Decide while calm what would change your mind, then check against it rather than against your feelings on the day.
The arithmetic
Where it breaks
- Applied carelessly it becomes an argument for constant trading, and turnover has its own costs which in property are punishing.
- The would I buy it today test needs an honest current valuation, and for illiquid assets that is exactly what is hardest to obtain.
- Some costs of selling are real and forward looking rather than sunk, including agent fees, the NOC and the time the sale takes. Those belong in the decision.
- Tax consequences of realising a gain or loss are forward looking too, and in jurisdictions where they apply they can legitimately change the answer.
- It ignores non-financial reasons for holding, which can be entirely valid provided they are stated rather than disguised as financial ones.
- A property that would not be bought today may still be worth holding if selling now means realising a temporary dislocation, which is a judgement the test cannot make for you.
When to use it
Annually on everything you own, and immediately whenever you catch yourself explaining a holding by reference to what you paid for it.
The Net Rental Yield does this arithmetic for you, in your currency, in about thirty seconds.
Open the calculatorSources
Last reviewed . Educational research, not personal advice. Disclosure standards.