Sunk Cost

Sunk Costs and the Sunk Cost Fallacy

Definition

A sunk cost is any time, money, or effort that has already been spent and cannot be recovered. Because these resources are gone, they should not influence future decisions—but people often let them do so.

Key takeaways

• Sunk costs are irreversible past investments and should not affect forward-looking choices.
• The sunk cost fallacy is continuing a failing course of action solely because of past investments.
• Psychological biases—loss aversion, commitment bias, and the endowment effect—make it hard to abandon sunk costs.
• Practical steps (focus on future returns, set limits, get outside perspective) reduce the risk of throwing good resources after bad.

How sunk costs affect decisions

Once resources are spent, they cannot be recovered. Rational decision-making evaluates only future costs and benefits, not past expenditures. In practice, people and organizations often continue projects or commitments because they’ve already invested, even when prospects are poor.

Examples:
* An expensive, nonrefundable course that you don’t enjoy: continuing just because you paid is driven by sunk-cost thinking.
A company that has invested millions in a product despite new research showing low demand may keep investing to justify past spending.
Governments and firms sometimes keep funding large projects (historically, the Concorde is an oft-cited example) long after it’s clear they won’t be profitable.

Why the fallacy happens

Behavioral economics explains several drivers:

• Loss aversion: People feel losses more strongly than equivalent gains, so abandoning a past investment feels like conceding a loss.
• Commitment bias and cognitive dissonance: After committing, people resist admitting they were wrong and stick with original plans.
• Endowment effect: Investments increase perceived value, making the idea of walking away feel costlier than it objectively is.

How to avoid the sunk cost fallacy

Adopt habits and decision rules that focus on future value:

• Focus on future returns: Ask whether you would make the same decision now if past costs were irrelevant.
• Set limits and review points: Define stop-loss thresholds, milestone reviews, or maximum additional investment before committing.
• Seek external perspective: Get input from someone without emotional or financial attachment to the decision.
• Use precommitment and checklists: Decide in advance the conditions under which you’ll stop a project or sell an investment.
• Quantify future prospects: Base decisions on projected outcomes and probabilities instead of justifying past spending.

Bottom line

Sunk costs are unrecoverable and should not drive decisions. Recognizing the psychological pull of past investments and applying forward-looking rules—clear limits, objective reviews, and outside advice—helps prevent further losses and leads to better choices.