How Does Time Decay (Theta) Punish Traders Who Fall Victim to the Sunk Cost Fallacy?

The sunk cost fallacy makes traders hold onto losing options, believing they will recover. Theta, the time decay component, is constantly eroding the option's value, especially as expiration approaches.

This decay punishes the trader by ensuring the option loses value every day, compounding the loss until the option becomes worthless, thus magnifying the initial error.