This episode delves into cognitive biases and heuristics that impact financial decisions, focusing on the "sunk cost fallacy." Based on Dr. Ryan Anderson's newsletter, it explains how mental shortcuts can backfire, using examples like the price-quality heuristic and availability heuristic. The core discussion unpacks the sunk cost fallacy—the tendency to continue investing in a losing endeavor due to past investment—driven by loss aversion, commitment bias, and emotional reasoning. Strategies for overcoming these biases include detaching from past investments, setting clear investment rules, diversification, seeking outside perspectives, and embracing "pivoting."

• Cognitive biases and heuristics can derail financial decisions: Mental shortcuts like the price-quality heuristic and availability heuristic can lead to sub-optimal choices, but the sunk cost fallacy is particularly dangerous, trapping us in losing investments

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• Sunk cost fallacy is driven by loss aversion, commitment bias, and emotional reasoning: Humans hate to lose, feel compelled to stick with past decisions (especially if public), and let emotions override logic, making it hard to walk away from failing ventures

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• Overcome biases with awareness and practical strategies: Detach from past investments, set clear pre-determined investment rules, diversify your portfolio, seek objective outside perspectives (financial advisor or trusted friend), and embrace "pivoting" when something isn't working

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