Escalation of Commitment

Escalation of commitment is the tendency to increase investment in a failing course of action despite evidence that it is not working. This is closely related to the sunk cost fallacy and is driven by the desire to prove that the initial decision was correct.

In crypto, this often leads to traders pouring more capital into a losing position, hoping to lower their average cost basis. This behavior can lead to total loss of capital, especially in leveraged derivative markets.

It is a major systemic risk, as it can cause individuals and even institutions to remain committed to flawed protocols or assets long after they should have exited. To avoid this, it is essential to have clear, objective exit criteria established before entering a trade.

When these criteria are met, the position must be closed, regardless of the emotional desire to continue. Recognizing the signs of escalation of commitment is vital for maintaining discipline and protecting capital.

It is a critical aspect of risk management in any high-stakes financial environment.