The Paid Price Bias in Human Capital & Investing
Cost basis doesn’t predict returns. Tenure doesn’t predict performance. Yet we keep mistaking history for value.
In markets, few traps are as destructive as the paid price bias. An investor buys a stock at $30. The stock drifts to $24. Instead of exiting and reallocating into a stronger performer, they wait, muttering: I’ll sell when it gets back to $30.
This is a mistake. The market doesn’t care what you paid. The stock doesn’t know your cost basis. It will rise or fall based on future cash flows, future demand, and future expectations. And yet, investors let that arbitrary anchor dictate their decisions. They tie up capital in underperformers, missing higher-return opportunities, all because they cannot bear the idea of realizing a “loss.”
The uncomfortable truth is that we make the exact same mistake in how we manage human capital within organizations.
Think about how often you’ve heard someone justify a career decision with sunk effort: I’ve already put ten years into this company, I can’t leave now. Or how many times you’ve seen a manager refuse to cut a struggling employee because we’ve already invested so much in training them. These are not strategic decisions; they’re psychological errors, no different from the investor hanging onto LULU 0.00%↑ at $400 while ignoring that MSFT 0.00%↑ or NVDA 0.00%↑ are compounding at multiples of Lululemon’s return.
It shows up everywhere. Employees cling to outdated certifications or degrees, convinced that the expense of acquiring them guarantees future relevance, even as the market moves on. Founders push forward with failing strategies, reasoning to themselves that they’ve already poured in too much capital to pivot now. Even large institutions fall prey when entire departments are kept alive not because they produce, but because they’ve always been here. This is paid price bias at scale.
Why do we do this? Behavioral finance has studied it for decades actually. Anchoring is hardwired into human psychology. We use prior reference points: whether it’s the price we paid for a stock, or the time we’ve put into a role, to shape our perception of value. Admitting that the reference point is meaningless feels like admitting failure. To sell a stock below cost is to lock in a loss (ignore for now tax-loss harvesting). To leave a company after ten years is to “waste” a decade. To cut an employee after investing in training is to admit the training didn’t pay off. Loss aversion is so powerful that we’d rather carry the dead weight than confront the reality that not every bet pans out. That we should, in fact, be failing lest risk not trying hard enough.
But the laws of opportunity cost are unforgiving. Time, capital, and talent are scarce. Every dollar tied up in a bad stock is one that isn’t compounding elsewhere. Every year an employee spends stagnating is a year their skills could have been growing in a different role. Every manager who clings to an underperformer is making a choice not to reallocate that headcount to someone who could deliver more.
The healthier lens is to ignore the past and focus only on the future. Lean into the sunk-cost falacy more. In investing, the right question is not what did I pay? but what is the expected return from here? In careers, it is not how long have I been here? but what opportunities does this role open from today forward? For managers, it is not how much have we put into this person? but what will they produce in the next twelve months relative to alternatives? The past is sunk. Only the forward trajectory matters.
Imagine this in visual terms. Picture two curves on a graph. The first, a red dashed line, represents the value of sunk investment: the onboarding, the training, the tenure. At the beginning, the red line dominates. The investment is heavy, the returns not yet visible. Over time, however, the relevance of that initial investment decays. A year of onboarding doesn’t compound in value — it fades into the background. The second curve, in blue, represents the trajectory of actual performance. Ideally, performance climbs and overtakes the red line. At that moment, the investment pays off. But if performance lags, if the blue line never crosses, then the organization is left carrying a liability. The longer you wait, the more obvious the drag becomes.
Another way to see it: think about a crossover chart. One line, in red, steadily accumulates — the cost of training, tenure, the “investment” already made. The other line, in blue, tracks relative performance. In a healthy case, performance accelerates upward, easily surpassing cost. But often it plateaus or even declines. At the inflection point, the rational choice is to cut. But most managers don’t. They hope. They delay. They wait for a rebound that rarely comes. That wait is paid for in opportunity cost.
I love trying to identify parallels between investing and human capital management. Investors hold a stock for years because they can’t stomach a realized loss, while ignoring that the capital could have been compounding elsewhere. Managers keep a ten-year veteran who underdelivers, rationalizing that “they’ve given so much to the company,” while cutting a newcomer who outperforms but is more expensive. In both cases, backward-looking bias leads to misallocation. Capital — financial or human — gets stuck in the wrong place.
The cost is not just performance. Anchoring corrodes culture. Teams see when underperformers are carried for sentimental reasons. High performers resent when tenure is valued over results. Mediocrity metastasizes. Organizations that cling to sunk costs send a message: it doesn’t matter if you deliver, it matters how long you’ve been here. That is poison for a performance-driven culture.
Breaking the bias requires discipline. For individuals, it means recognizing that tenure is not always an asset — skills, growth, and forward opportunity are. If you wouldn’t take your job again today, that is evidence you may be stuck in sunk-cost logic. For managers, it means treating employees like portfolio holdings. Double down on your outperformers. Cut your laggards early. Don’t confuse tenure with trajectory. For organizations, it means institutionalizing a rebalancing process with regular talent reviews that ask not how much was invested, but what the expected return is going forward.
The best investors know this intuitively. They sell losers, even at a loss, and reallocate to winners. They resist the temptation to anchor to cost basis. The best operators do the same. They prune the garden. They refuse to let the weeds choke out the flowers.
Paid price bias afflicts 95% of investors, and just as many organizations. The cure is simple to state, but difficult to practice: stop looking backward at sunk costs. Start looking forward at relative performance and opportunity cost. Your portfolio and your team are both living allocations of scarce capital. The past is gone. The only thing that matters is whether today’s choices compound tomorrow’s returns.
What a weird and wonderful world,
