It can be difficult to walk away from a project when significant resources have already been committed, making the choice to change course feel like a failure. This dilemma occurs in both professional and personal lives, where the weight of past investments complicates future choices. People can find themselves continuing down a path not because it is promising, but because of the time and energy they have already dedicated to it.
Defining Sunk Cost
A sunk cost, also called a retrospective cost, is any expense that has already been paid and cannot be recovered. These past costs are not relevant to future decisions. The term “cost” is not limited to money; it can also encompass time, effort, or emotional energy. Once spent, these resources are gone regardless of what decision is made next.
A straightforward example is purchasing a non-refundable ticket to a concert. If you buy a ticket for $100, that money is a sunk cost. Whether you decide to attend the concert or not, the $100 cannot be retrieved. The decision to go should be based on whether you will enjoy the concert, not on the fact you have already paid.
This concept separates past, unchangeable expenditures from prospective costs, which are future expenses that can be avoided. Rational decision-making ignores sunk costs and focuses only on the potential future outcomes of a choice. Factoring past expenditures into a new decision is a common but misleading thought process.
Understanding the Sunk Cost Fallacy
The sunk cost fallacy is the tendency to continue an endeavor after an investment of money, effort, or time has been made. This error in judgment, also known as “escalation of commitment,” occurs when choices are based on past investments rather than on future prospects. It leads to irrational decisions because the focus is on what has already been spent instead of on present and future costs and benefits. This can create a cycle where the more one invests, the more committed they feel to continuing.
The psychological roots of this fallacy are powerful. One primary driver is loss aversion, a cognitive bias where the pain of a loss is felt more intensely than the pleasure of an equivalent gain. Abandoning a project can trigger feelings of wastefulness and guilt, which people naturally want to avoid. Continuing with the endeavor allows the decision to be framed as a potential success, avoiding the admission that prior resources were wasted.
Another contributing factor is commitment bias, particularly when an individual feels personally responsible for the initial decision. This sense of responsibility creates an emotional attachment, making it harder to objectively evaluate the situation. The desire not to appear wasteful to oneself or others can also be a strong motivator.
Examples of the Sunk Cost Fallacy in Action
In Business
A common business example is continuing to fund a failing project. A company might invest millions in developing a new software product. If market research later indicates the product is unlikely to sell well, management might still push forward, reasoning that they have already spent too much money to stop. This is often called “throwing good money after bad.” A famous case is the Concorde supersonic jet, which its government backers continued funding long after it became clear it would not be economically viable.
In Personal Finance
In personal finance, an individual might hold onto a poorly performing stock. Even if the company’s fundamentals have deteriorated, the investor may refuse to sell because they don’t want to accept the loss on their initial investment. They might wait for the stock to return to its original purchase price, a decision based on sunk cost rather than future potential. Similarly, someone might keep pouring money into repairing an old car because they have “already invested so much” in it, even if the repairs exceed the cost of a more reliable vehicle.
In Everyday Decisions
The sunk cost fallacy appears frequently in daily life. A person might force themselves to finish a boring movie simply because they paid to rent it. The decision to continue is driven by the desire to “get their money’s worth,” even though the time could be spent on a more enjoyable activity. Another instance is overeating at an all-you-can-eat buffet, where a person may eat beyond comfort to justify the price paid for the meal.
How to Avoid the Sunk Cost Fallacy
To counteract the sunk cost fallacy, the primary focus must shift from past expenditures to future costs and benefits. Acknowledging that the sunk costs are gone forever is the first step. When facing a decision, explicitly ignore what has already been invested and evaluate the options based only on their future potential. This forward-looking perspective prevents past losses from clouding judgment.
Seeking the opinion of a neutral third party can provide clarity. Find someone who was not involved in the original decision and has no emotional or financial stake in the past investments. This person can offer an unbiased perspective on the current situation and future possibilities. Their objective viewpoint can highlight whether continuing is a logical choice or simply an attempt to justify past actions.
A useful technique is to reframe the decision. Ask yourself, “Knowing what I know now, if I hadn’t already invested in this, would I choose to do so today?” This mental exercise detaches the choice from the history of the investment. If the answer is no, it is a strong indicator that the best course of action is to walk away. Setting clear goals and limits before starting a project can also help by creating predefined exit points.