What is the Sunk Cost Fallacy?
The sunk cost fallacy occurs when we make irrational decisions based on previously invested resources (time, money, or effort) that cannot be recovered. Instead of focusing on future costs and benefits, we let past investments drive our choices— even when continuing would clearly be harmful.
Economists call these unrecoverable investments "sunk costs" because they're permanently lost—like a ship that has sunk to the ocean floor. Rational decision-making should ignore sunk costs and focus only on future possibilities. But psychologically, we hate feeling like our past efforts were "wasted."
Simple Example
The Half-Read Boring Book: You've spent 8 hours reading a book that's incredibly boring and unhelpful. Instead of stopping and finding a better book, you keep reading because "I've already invested so much time." The 8 hours are gone whether you finish the book or not—but you can save yourself 4 more hours of misery by quitting now.
Why We Fall for Sunk Costs
😢 Loss Aversion
We feel the pain of losses more strongly than equivalent gains. Abandoning our investment feels like losing twice.
🎯 Commitment Escalation
The more we've invested, the harder it becomes to admit the decision was wrong and change course.
🏷️ Self-Justification
We want to appear consistent and rational, so we continue poor decisions rather than admit mistakes.
🔮 Optimism Bias
We convince ourselves that just a little more investment will turn everything around.
Common Sunk Cost Scenarios
🎓 Education & Career
The Problem: "I've spent 3 years in medical school, but I realize I hate it and want to be a teacher."
Sunk Cost Thinking: "I can't quit now—I'd waste all that time and money!"
Rational Analysis: Those 3 years are gone either way. What matters is the next 40 years of career satisfaction.
💔 Relationships
The Problem: A relationship that's clearly not working after 5 years together.
Sunk Cost Thinking: "We've been together so long, we can't break up now!"
Rational Analysis: Past time spent doesn't justify future unhappiness for both people.
🏢 Business Projects
The Problem: A product development project that's over budget and behind schedule, with poor market prospects.
Sunk Cost Thinking: "We've invested $2 million already—we can't stop now!"
Rational Analysis: Will additional investment likely produce profitable returns?
🎲 Gambling & Investing
The Problem: Continuing to bet or hold losing investments to "get back to even."
Sunk Cost Thinking: "I'm down $5,000—I need to keep playing until I win it back!"
Rational Analysis: Each new bet should be evaluated independently of past losses.
In-Depth Analysis: The Restaurant Investment
Scenario: Marcus's Failing Restaurant
Context: Marcus invested $150,000 to open a restaurant. After 18 months, it's losing money and has poor reviews, but he keeps investing more to "save" his original investment.
Rational Decision Framework:
1. Ignore Sunk Costs
The $150,000 is gone. Don't let it influence future decisions.
2. Analyze Future Prospects
What's the realistic probability that $50,000 more will make the restaurant profitable?
3. Consider Opportunity Cost
What else could be done with that $50,000? Start a different business? Invest in training?
4. Value Time Investment
How much additional time and energy will this require? What are the opportunity costs of that time?
How to Counter the Sunk Cost Fallacy
1. Use the "Fresh Start" Test
Ask yourself: "If I were starting from scratch today, would I begin this project/relationship/investment?"
2. Focus on Future Value
Evaluate decisions based only on future costs and benefits, not past investments.
3. Reframe "Wasted" Investment
View sunk costs as tuition for learning valuable lessons, not wasted money.
4. Set Decision Criteria in Advance
Before starting projects, define clear success metrics and exit criteria.
5. Get Outside Perspective
Ask someone uninvested in the decision what they would do.
When Persistence Makes Sense
Not every continuation is a sunk cost fallacy. Sometimes persistence is rational:
📈 Learning Curve
When you're in the temporary difficulty phase of acquiring valuable skills
🎯 Near Completion
When you're close to achieving the original goal with high probability
🔄 Temporary Setback
When current difficulties are likely to be short-term with recovery probable
💎 High Future Value
When completing the project will provide substantial future benefits
Practice: Sunk Cost or Rational Persistence?
Scenario Analysis
Evaluate whether continuing these situations represents sunk cost fallacy or rational persistence:
Situation: "Sarah has been learning violin for 2 years and finds it incredibly difficult. She's not progressing as quickly as she hoped and is considering quitting. Her teacher says most students take 3-4 years to really enjoy playing. Sarah thinks: 'I've already invested so much time and money in lessons—I can't quit now.'"