The Sunk Cost Fallacy: Why We Keep Investing in Lost Causes

Hi everyone, welcome back to my blog! I hope you’re all doing well. Today, I want to talk about a bias that I think we’ve all fallen victim to at some point: the sunk cost fallacy. This psychological trap can lead us to waste time, money, and energy on things that no longer serve us, all because we’ve already invested in them.

The sunk cost fallacy is the tendency to continue a project or decision because of the resources we’ve already put into it, even when it would be more rational to cut our losses. The term “sunk cost” refers to resources that have already been spent and can’t be recovered like money, time, or effort. Rational decision-making would mean we consider only the future costs and benefits when making choices. But in reality, our past investments weigh heavily on us, often leading us to continue making unwise decisions.

A classic example of the sunk cost fallacy is staying through a movie that is super boring at the cinema just because you paid for the ticket. Rationally, whether you stay or leave, the money is already gone, so your decision should be based on whether you’re enjoying the experience. However, many of us feel compelled to stay because we don’t want to “waste” the money. Ironically, by staying in the cinema, we waste something even more valuable: our time.

This fallacy plays out in various aspects of life. Think about relationships, for instance. People sometimes stay in friendships or romantic relationships that are no longer fulfilling simply because they’ve been together for a long time. The years invested make it difficult to walk away, even if the relationship is no longer beneficial. Similarly, in academics or careers, people may continue pursuing a degree or job they dislike because they’ve already spent years working towards it. The fear of “throwing away” those years clouds the fact that continuing down an unfulfilling path only adds to the sunk costs.

Businesses and governments also fall into the sunk cost trap. A well-known example is large-scale infrastructure projects that continue receiving funding even when they exceed budget and are failing. A prime example is the Concorde, the supersonic passenger jet developed by the British and French governments. Despite mounting costs and limited commercial viability, they continued pouring money into the project, unwilling to abandon it due to the billions already spent. This is often called the Concorde Fallacy a real-world manifestation of the sunk cost fallacy on a massive scale.

So why do we fall for this bias? It’s largely driven by loss aversion, a key concept in behavioural economics I've written about in my other blog posts. We hate losing what we’ve invested, even if walking away would be the more rational choice. There’s also a psychological element of commitment and consistency, we like to see ourselves as consistent individuals who follow through on our commitments. Abandoning a project feels like admitting failure, which is uncomfortable, so we push forward in the hope of justifying our initial investment.

How can we avoid the sunk cost fallacy? The key is to shift focus from past investments to future outcomes. When making a decision, ask yourself: If I were starting from scratch, would I still choose this option? If the answer is no, it’s probably time to move on. Another useful strategy is setting exit criteria before starting a project or investment and deciding on specific conditions where you’ll walk away. This can help reduce emotional attachment and make rational decision-making easier.

Understanding the sunk cost fallacy is crucial because it empowers us to make better financial, personal, and professional choices. Learning to let go of unproductive activities and investments frees up our time and energy for more rewarding opportunities. Have you ever found yourself falling for the sunk cost fallacy? Let me know in the comments below!

Thank you for reading and see you next time! :)