You may have stayed in your seat until the end of a boring movie because you didn't want to waste the ticket. Or, already full, you may have forced yourself to finish a meal because leaving food felt like throwing money away. Yet if you think it through, the ticket money is gone whether you stay to the end or walk out.
A cost that has already been spent and cannot be recovered no matter what you choose is called a ‘sunk cost.’ The mental trap of letting such unrecoverable costs distort future decisions is called the ‘sunk cost fallacy.’
In this article, we will look in turn at what a sunk cost is, why people fall into this trap, examples from experiments and history, and ways to avoid it.
A Mind Held Hostage by Money Already Spent: How Sunk Costs Work and How to Overcome Them
Costs You Can't Get Back: What Is a Sunk Cost?
Economics divides costs into two kinds: costs that have already been paid and cannot be reversed, and future costs that can still be avoided depending on the choice made now.
(1) Costs that have already sunk
The English word ‘sunk’ means submerged beneath the water. Money already spent building a factory, advertising that has already run, and funds invested in research and development all belong here: costs that do not change whatever decision you make.
(2) Let bygones be bygones
Economics holds that a rational decision should compare only future costs and benefits. This is called the ‘bygones principle,’ in the sense of letting what is past stay in the past.
(3) Doing the math with a factory example
Suppose a company is building a factory for $100 million that is expected to be worth $120 million, but after spending $30 million, the value of the finished factory drops to $65 million. Finishing it would cost another $70 million, so stopping is the better choice regardless of the money already spent. If, on the other hand, the value were $75 million, continuing construction would be the right call.
Why People Fall into the Trap
Even when the math is clear, people readily break this principle. Behavioral economics explains that several psychological forces lie beneath it.
- Waste aversion: Quitting now would mean admitting that the money and time spent so far were wasted, so people want to avoid that moment.
- Loss aversion: People feel the pain of losing more strongly than the pleasure of gaining something of the same size, so they shy away from choices that lock in a loss.
- Personal responsibility: If you were the one who made the original decision, it is hard to admit the mistake, so you cling to it even more.
- Optimism bias: Once money has been staked, it is easy to believe the choice is more likely to succeed than it really is.
In fact, in a 1977 experiment by Barry Staw and Frederick Fox, participants who were told they had personally made an earlier failed investment decision reinvested, on average, more money in the same division than participants who were told someone else had made it.
Sunk Costs in Experiments and History
The sunk cost fallacy has been confirmed again and again, both in the laboratory and in large national projects.
(1) The theater season ticket experiment
In 1985, American psychologists Hal Arkes and Catherine Blumer randomly divided buyers of season tickets to a university theater and gave discounts to only some of them. Those who had paid full price attended plays early in the season more often than those who had received discounts. The plays were equally enjoyable; it was the amount of money paid that changed people's behavior.
(2) The ski trip question
In the same study, people were asked to imagine that they had mistakenly booked a $100 trip and a $50 trip they would enjoy more for the same day, with neither refundable, and to say which they would take. More than half chose the trip they had paid more for, even knowing they would enjoy it less.
(3) The Concorde fallacy
The Concorde, a supersonic airliner jointly developed by Britain and France, could not be stopped even after it became clear it would struggle to turn a profit, because of the money already invested and political commitments. For this reason, the sunk cost fallacy is also called the ‘Concorde fallacy.’
Decision Techniques for Avoiding the Trap
Anyone can fall into the sunk cost fallacy, but a few habits can weaken its pull.
(1) Ask whether you would choose it if starting fresh
Set aside everything you have invested so far and ask yourself whether you would choose the same path if you were facing this decision for the first time today. If you cannot answer yes, it may be a sign that it is time to stop.
(2) Set stopping criteria in advance
If you set criteria for quitting, such as a budget, a time frame, or a goal, before starting a project, you can make the call without being swayed by emotion when that moment actually arrives.
(3) Separate deciding from evaluating
Separating the person who made the original decision from the person who evaluates whether to continue reduces clinging driven by personal responsibility. This is why many companies have large projects re-examined midway from an outside perspective.
That said, the experience and information gained from past effort are not sunk costs but assets you can use going forward. Forgetting past money does not mean throwing away past lessons.
The sunk cost fallacy is a trap in which the feeling of not wanting to waste something makes your future choices for you. Holding on to the end is not always perseverance, and stopping at the right time can also be a courageous decision.
Calmly weighing what you stand to gain and lose from here on, rather than what you have already spent, is the first step in economic thinking toward choices you won't regret.
