In both personal and professional domains, we often find ourselves trapped by the weight of past investments. The sunk cost fallacy, a cognitive bias that clouds our decision-making, tempts us to persist with failing endeavors simply because we have already invested time, money, energy, or emotions.
In this article, we will delve into the intricacies of the sunk cost fallacy, exploring its manifestations in various scenarios and highlighting the importance of breaking free from its grip. By understanding the fallacy and its consequences, we can make more rational choices based on prospects rather than being bound by past investments.
The sunk cost fallacy is a special dish our brain cooks up that makes you say, “I have come this far. I am not giving up now because that would be stupid.” It is the reason people don’t give up when everyone is telling them to call it quits. We don’t walk away even if every fiber within screams, hoping for a reprieve.
In our world, not giving up and persevering are put on a pedestal because we hope everything will be okay and we will be better off when it is over. It is the right thing to do because it is the more challenging choice, so it must be the way that produces better results. People worship and admire the braver choice because it requires sacrifice. It is nothing short of heroic.
The Cost of Staying Stuck
The sunk cost fallacy is more than just a quirky mental error—a deeply embedded psychological bias that leads people to make irrational decisions, often to their detriment. The fallacy occurs when we continue to invest time, money, effort, or emotional energy into something that no longer benefits us simply because we’ve already committed so much. The critical flaw here is that the past financial, emotional, or otherwise investments are irretrievable. No further investment will change that fact.
This phenomenon is most common in situations where the stakes feel high. Take the movie example, where you’ve spent money on tickets, snacks, and parking. After sitting through an hour of a terrible film, you’re miserable, but the thought of leaving feels almost unacceptable. You think, “I’ve already spent the $30, so I might as well stay.” But this mindset is a trap. The $30 is already gone, and the decision to stay has no bearing on recouping that amount. It becomes a rationalization for enduring discomfort.
When the same principle is applied to business or larger projects, the sunk cost fallacy becomes even more destructive. Take, for instance, a company that has poured substantial resources into a marketing campaign that isn’t yielding results. Even though the campaign has failed to meet its objectives, the belief that “we’ve already invested so much” leads to further investment. This cognitive distortion distorts decision-making, as the real question should be whether future investments will lead to success—not how much has already been spent. However, the decision to keep pouring resources into the campaign is often driven by an emotional attachment to the work done, making it harder to face the reality of the failure.
The sunk cost fallacy makes it hard to cut your losses. When faced with a bad situation, the more you invest, the harder it becomes to make a clean break. It convinces you that things might get better if you invest more time or money. But this is rarely the case. In reality, each additional investment only increases the total cost of the failure without improving the chances of success.
The Emotional Toll: Why We Hold On
The sunk cost fallacy isn’t purely a financial issue—it’s also a psychological one. This bias affects our emotions and sense of self-worth, particularly when we’ve invested deeply in something or someone over a long period. The more you’ve invested emotionally, the harder it is to admit that the relationship, project, or investment is not worth continuing. This emotional attachment can cloud rational judgment and trap people in unhealthy patterns.
Consider someone who remains in a toxic relationship. They may have invested years of time, emotional energy, and effort into the person they love, only to be met with repeated betrayal. Yet, each time the partner apologizes and begs for forgiveness, the individual thinks, “I’ve already invested so much in this relationship. It would be a waste to give up now.” This emotional attachment leads them to stay, even though they may be emotionally drained, hurt, and far from receiving what they need.
The sunk cost fallacy distorts the perception of the relationship’s value. The person’s emotional investment becomes the justification for staying, even though the reality is that the relationship is fundamentally unhealthy. Walking away is painful because it feels like admitting failure, but staying only prolongs the misery. By continuing, they ignore the potential for growth and happiness in new ventures, instead prioritizing past investment over their emotional well-being.
Emotional investment can be even more insidious than financial or time-based investments because it plays into deep psychological needs: the fear of regret, the need to avoid failure, and the desire to be seen as consistent. This psychological burden can paralyze us, making it incredibly difficult to let go, even when the benefits of moving on are clear. The longer we stay in a failing situation, the greater the emotional cost becomes, and the harder it is to let go of the past. The emotional toll is not just about sadness or frustration but the emotional strain of staying in a draining situation without providing any real fulfillment.
The Investor’s Trap: Financial Blindness
Investing is a logical process, or at least it should be. Yet, the sunk cost fallacy plays a prominent role in how many investors behave, especially when emotions come into play. The core issue is that people often cling to losing investments because they’re emotionally tied to them, convinced that selling will make their prior decision seem wrong or foolish. In reality, selling a poor investment is often the most rational decision.
Consider an investor who buys shares in a promising company—however, the company’s performance dips over time, and the stock price plummets. Instead of cutting losses, the investor holds on, hoping that the market will eventually turn around. “I’ve already lost so much money. If I sell now, it will feel like throwing away everything I’ve put in,” they might say. This belief is grounded in the sunk cost fallacy. The price at which they bought the stock is irrelevant. What matters is whether the stock has any future potential for recovery—and if it doesn’t, it’s time to cut the losses and invest elsewhere.
The psychological pull of the sunk cost fallacy is powerful in investing. People often equate their emotional attachment to a stock or a business venture with a sense of personal failure. The longer they hold on, the more entrenched they become in the idea that they must recoup their losses, even if their prospects are slim. The real mistake isn’t selling at a loss—it’s holding onto a stock that no longer aligns with one’s investment strategy or objectives.
The irrational desire for consistency compounds this behavior. Investors want to avoid admitting they made a mistake, so they continue with the original investment, hoping it will somehow correct itself. In doing so, they disregard the fact that the investment is unlikely to provide a return, worsening their financial position.
The Need for Consistency: The Burden of the Past
The desire for consistency inherently drives humans. We seek to maintain alignment between our actions, beliefs, judgments, and decisions. The sunk cost fallacy exploits this desire by making us feel that if we deviate from a previous decision, we somehow betray our past selves. This emotional discomfort keeps us holding on to bad investments, toxic relationships, or failing projects.
Imagine halfway through a work project that has clearly lost its value. The temptation to keep going is powerful simply because we’ve already committed to it. This need for consistency pushes us to rationalize that we must follow through on what we started. It’s difficult to admit that we made a mistake or that a project is no longer viable because doing so would be inconsistent with our previous actions. The idea of abandoning a project feels like a failure, so we continue despite the lack of rational justification.
Historical examples like the Concorde project vividly illustrate this principle. The British and French governments knew that the supersonic airliner would never be financially viable, but they continued to fund it anyway. Why? Because to abandon the project would have been seen as a failure, as an admission that the resources already spent had been wasted. The need for consistency, for maintaining a coherent narrative, led both nations to keep funding an unprofitable venture, ultimately wasting billions of dollars.
This need for consistency is a powerful driver of irrational decision-making. It’s more comfortable to continue with a bad decision than to admit that it was the wrong choice in the first place. The sunk cost fallacy feeds this impulse, leading people to make choices based on what has already been invested rather than what’s best for the future.
The Real Cost: The Price of Continuing for the Wrong Reasons
The sunk cost fallacy is more than just a cognitive error—it can have real, long-lasting consequences. Every moment spent continuing with a failed project, toxic relationship, or bad investment represents a missed opportunity. Continuing down a losing path doesn’t just keep you stuck in the past and prevents you from moving forward, pursuing new opportunities, or reallocating resources to more fruitful endeavors.
We often fail to recognize the hidden costs when we continue with something because of past investments. These costs aren’t just financial—they can be emotional, psychological, or time-related. The more you stay in a situation that isn’t working, the more you waste time and energy that could be better spent elsewhere. The price of continuing isn’t just the money you’ve already spent—it’s the future you could have created by redirecting your resources.
The sunk cost fallacy leads us to rationalize poor decisions, justifying the continuation of a losing venture because of the fear of admitting failure. But in truth, the greatest cost is not the money or time already lost—it’s the lost potential. Every day you stick with a decision that isn’t working is a day you could have spent moving forward. Whether it’s an investment that’s no longer paying off, a relationship draining your energy, or a project going nowhere, holding on out of fear of waste only compounds the problem.
Forgetting the Past: A Rational Path Forward
Rational decision-making requires disregarding sunk costs—the money, time, or energy already spent—and instead focusing solely on the potential for future success. The past is gone; no matter how much you’ve invested in something, that investment is a sunk cost. Moving forward, only the present and future matter. Rational decisions are based on current realities and the best possible future outcomes, not the ghosts of past commitments.
When faced with the decision to continue or quit, ask yourself, “If I were to make this decision fresh, knowing what I know now, would I still make the same choice?” If the answer is no, it’s time to move on. The sunk cost fallacy often clouds judgment, convincing you to keep going because of the fear of loss when, in reality, it’s the continuation that’s the true loss.
By acknowledging and rejecting the sunk cost fallacy, you free yourself from the weight of the past. Whether in investments, relationships, or personal endeavors, letting go of what’s already lost opens the door to new opportunities. The past may shape you, but it should never control your future. You can make rational decisions by focusing on future possibilities, not past investments.
Conclusion
The sunk cost fallacy poses a significant challenge in our decision-making processes, impacting personal and professional spheres. Recognizing this cognitive bias and its manifestations is the first step toward overcoming its grip. By detaching from past investments and focusing on prospects, we can make rational choices that align with our long-term goals.
Let us embrace a mindset that values future outcomes over the irretrievable investments of the past, empowering us to make sound decisions.
This article belongs to The Art of Thinking Clearly Series based on Rolf Dobelli’s book.