Sunk Cost Fallacy: Throwing Good Resources After Bad

Most of us have, at some point, stayed too long in a bad movie, kept using a product we don’t like, or continued pouring money into a failing project simply because we had already invested something in it. This pattern is known as the sunk cost fallacy.

In economics and rational decision theory, sunk costs are past expenditures that cannot be recovered, no matter what we do next. Because they are gone, they should not influence current decisions. Yet in real life, people often let these unrecoverable investments weigh heavily on what they decide to do going forward.

What Is the Sunk Cost Fallacy?

Sunk cost fallacy is the tendency to continue an endeavor primarily because of prior investments, rather than because the future benefits justify continued investment. Instead of asking:

This fallacy shows up in business, public policy, personal finance, education, relationships, and everyday choices.

Why It Happens: Psychological Mechanisms

Several mechanisms make sunk cost thinking compelling:

1. Loss Aversion and Pain of Wasting
   Humans tend to experience losses more intensely than equivalent gains. Abandoning a project can feel like recognizing a loss or admitting that earlier choices were mistakes, which is emotionally painful. Continuing lets us postpone or deny that loss, even if it deepens over time.

2. Need for Consistency and Self-Justification
   People like to see themselves as rational and consistent. Turning away from a prior decision may feel like admitting we were wrong. To protect our self-image, we double down on the previous path and tell ourselves that success is still possible.

3. Effort Justification
   When we have worked hard for something, we want that effort to be meaningful. Persisting can feel like honoring the effort, while stopping feels like rendering it pointless.

4. Social and Reputational Pressures
   Leaders and teams may fear criticism for changing course. Stakeholders might interpret cancellation as failure or incompetence. As a result, they keep investing in troubled projects to signal confidence and commitment.

5. Misunderstanding of Costs
   People often intuitively treat all costs as if they were still "on the table". Without explicit training, the distinction between sunk (irretrievable) and marginal (relevant to the next decision) costs is unclear.

Everyday Examples

• Staying in a Long Movie You Dislike: You’ve paid for a ticket and already watched an hour. Even though you’re not enjoying it and could leave, you stay purely to "get your money’s worth."

• Continuing a Failing Business or Product: A company invests heavily in developing a product that shows poor market fit. Instead of pivoting or canceling, leaders pour in additional funds to "salvage" the original investment, ultimately losing even more.

• Personal Relationships: Someone remains in an unhealthy or stagnant relationship because they have already spent many years together, rather than because the future of the relationship looks positive.

• Education or Career Path: A student who realizes they dislike their chosen field might refuse to change majors because they have "already put three years into it," even though switching would likely lead to a more satisfying career.

When Sunk Cost Thinking Is Most Dangerous

Sunk cost fallacy is especially harmful when:

• New information clearly indicates low future returns, but decisions remain anchored to past investments.
• Decision-makers control large budgets or affect many people, such as in governments or large organizations.
• Emotional or identity investments are high, making it harder to accept that a course correction is needed.

Rational Perspective: What Should Matter Instead?

From a rational decision-making standpoint, only future costs and benefits are relevant. The guiding question is:

This principle applies whether the "cost" is money, time, status, reputation, or emotional energy. Past investments can be honored by learning from them, not by compounding them.

Mitigation Strategies

Reducing the influence of sunk cost fallacy often requires both cognitive tools and social norms:

1. Explicitly Label Sunk Costs
   In conversations and documents, call out which costs are sunk. For example, "The $2M we already spent is gone either way; the choice now is between spending an additional $1M with low odds of success, or reallocating that $1M elsewhere."

2. Use Forward-Looking Framing
   Ask: "If we were deciding this for the first time today, knowing what we know now, would we start or continue this project?" If the honest answer is no, that signals sunk cost thinking.

3. Predefined Exit Criteria
   Define in advance the conditions under which a project will be paused or stopped (e.g., minimum performance metrics by certain dates). This reduces the role of emotions at critical decision points.

4. Separate Responsibility for Evaluation and Ownership
   Have independent reviewers assess whether to continue major initiatives. People who did not champion the original decision may be less biased by sunk costs.

5. Normalize Course Corrections
   Create a culture where changing direction in response to new evidence is praised as good stewardship, not shamed as failure. Publicly highlight examples where stopping a project freed up resources for better opportunities.

Relationship to Related Biases

• Escalation of Commitment / Irrational Escalation: The sunk cost fallacy often underlies escalation of commitment, where decision-makers continue investing in a failing course of action.
• Loss Aversion: Loss aversion amplifies sunk cost effects by making people averse to recognizing losses already incurred.
• Status Quo Bias: A preference for maintaining current trajectories can interact with sunk cost thinking, making it harder to change course.

When Can Attending to Sunk Costs Be Rational?

There are rare situations where apparent sunk cost sensitivity might be rational—such as when future stakeholders interpret abandonment as unreliability, or when seeing a project through has reputational or learning value. Even in these cases, the decision should be grounded in future-oriented benefits, not just a desire to "justify" past spending.

Conclusion

The sunk cost fallacy illustrates how our desire not to waste past investments can lead us to waste even more. By deliberately focusing on future costs and benefits, setting clear exit criteria, and rewarding evidence-based course corrections, individuals and organizations can avoid throwing good resources after bad and make more adaptive, forward-looking decisions.