The Sunk Cost Fallacy

You’re stuck, though maybe you don’t realise it yet. Maybe you’re convinced you’re making progress, working incredibly hard and wondering why nothing’s changing. Either way, something’s not working, and that’s why you’re here.

Here’s the uncomfortable truth I need you to hear. Getting the life you want almost always means making changes, and inevitably you’ll have to give up elements from your old life before you can really get what you want from something new. It’s not optional, it’s not negotiable, and pretending otherwise is just another way of staying stuck.

This isn’t therapy. If you’re dealing with clinical depression, severe anxiety, or trauma, please see a professional. I say this as a doctor, not as a disclaimer.

There’s a distorted thinking pattern I see all too often in my practice, one that causes people to hold onto whatever problem they’ve got no matter how bad it is. It’s called the sunk cost fallacy, and I’d put serious money on the fact that this cognitive bias is behind many of the really poor decisions you’ve made in your life. What’s really concerning is you can end up being the victim of this without even realising you’re falling for it.

What Is the Sunk Cost Fallacy?

The sunk cost bias is continued overcommitment and investment into something that’s causing you loss in your life. Simple as that.

You’re probably saying this sounds a bit crazy, because why would anyone in their right mind hang on to something they know isn’t doing them any good at all. But we do. Especially those of us who are naturally stubborn and like a terrier that gets its teeth into something, we just won’t let go even when we know we should.

In economic terms, a sunk cost is a cost that has been paid and cannot be recovered. Research by Arkes and Blumer (1985) demonstrated this with their well-known theatre ticket study: season-ticket holders who received no discount attended more performances than those randomly given one — same seats, same shows, simply because they’d paid full price. The money was gone either way, but the psychological need to justify that investment drove the difference.

A typical scenario in the financial world could be where investors, fuelled by fear and greed, continue to throw good money after bad buying shares that are sliding in price to try and recoup their previous losses, hoping the market will turn. They’re not investing based on current value or future potential, they’re investing to validate past decisions. Kahneman and Tversky’s prospect theory (1979) showed that losses loom larger than gains in our minds, which is why we’ll take increasingly irrational risks to avoid accepting a loss.

Another example is the gambler who has already lost a fortune and bets even more money on the last race of the day to recoup his or her losses from earlier in the day, again literally throwing good money after bad. This isn’t hope, it’s desperation wearing hope’s clothing.

But Real Life Isn’t Just Stocks and Horses

Real life for most of us isn’t all stocks or shares or horse racing. There are more important things to invest our time and energy in every day, but there are always times when you need to look at your life and ask yourself some hard questions.

Are you continuing to invest time and emotion in poor relationships or a dead-end job? Are you going to be able to move on if you’re continuing to spend your time, energy, and effort investing in elements of your old life that will only hold you back?

I see this constantly in my practice: the patient who stays in a marriage that died years ago because they’ve already invested fifteen years; the professional who remains in a soul-crushing career because they’ve already spent a decade climbing that particular ladder; the entrepreneur who pours another year into a failing business because they’ve already sacrificed so much.

Staw (1976) called this “escalation of commitment” in his landmark research. He found that decision makers who felt responsible for negative consequences were likely to increase their commitment to that failing course of action. It’s not just about the money or time you’ve spent, it’s about your ego, your identity, and your unwillingness to admit you made a mistake.

Why Common Sense Doesn’t Apply

The problem is we often fail to separate our emotions from logic, and common sense doesn’t apply. Too often in life, simple common sense does not prevail, especially when we’re too emotionally involved. In the context of the sunk cost fallacy, this is where we continue to throw time and effort into things that will never change or do us any good.

Heath (1995) showed that people’s commitment to sunk costs increases when they anticipate regret over abandoning a project. We’re not just fighting the past investment, we’re fighting our imagination of future regret. It’s a double bind that keeps us trapped.

The Stubbornness Trap

Being stubborn can be a positive and a negative trait in your life, yet the sunk cost fallacy is a really negative form of stubbornness. It’s the “I’ve smoked all my life, and I might as well continue to smoke now” mentality. But hanging onto the bad things in your life is still hanging onto the bad things however you justify it.

I had a patient who stayed in a postgraduate degree they hated for years after realising it wasn’t for them, developing low mood and losing relationships along the way, simply because they couldn’t bear the thought of “wasting” the time already invested. When they finally left, within months they’d found work they loved and their wellbeing transformed. That time was gone either way, whether they stayed or left.

The Commitment Trap

The sunk cost fallacy causes a commitment to hang on rather than let go. I see people hang on to their problems for far too long. They’ve put a lot of blood, sweat and tears into those problems, so why let go? Even when the ship is sinking and these problems are dragging them down.

Brockner (1992) found that self-justification plays a large role in sunk cost effects. We don’t want to appear wasteful or foolish, so we continue investing to prove our original decision was sound. It’s ego protection disguised as perseverance.

In reality, the choice is yours, and you shouldn’t feel committed to something because of the pain or hurt it has caused. That pain has cost you a lot, so why let it cost you a lot in your future too? Just because of what you have lost doesn’t mean you should be a loser in the future.

Knowing When to Cut Your Losses

You need to know when to cut your losses, what to let go of, and when to walk away, and then more importantly, where to invest your time, emotion, and energy. Thaler (1980) introduced the concept of “mental accounting” to explain how we compartmentalise financial decisions. We treat sunk costs as if they exist in a separate account that must be balanced, rather than recognising they’re simply gone. The sooner you close those mental accounts, the sooner you can make rational decisions about your future.

Ask yourself: if I were starting from zero today, would I choose this relationship, this job, this path? If the answer is no, you need to seriously examine why you’re still there. If the answer is yes, you’re not falling for the sunk cost fallacy, you’re making an active choice to continue.

The Way Forward

The antidote to the sunk cost fallacy isn’t to become cold and calculating, abandoning everything at the first sign of difficulty. That’s just another cognitive distortion. The antidote is to make decisions based on current and future value, not past investment.

I see recovery from the sunk cost fallacy in my practice regularly. It looks like the person who finally leaves the relationship they’ve been “working on” for a decade. It looks like the executive who quits the prestigious job that’s grinding them down. It looks like the student who changes course after years of following the wrong one. And in every case, within months, they tell me the same thing: “I should have done this years ago.”

You know what they never say? They never say “I wish I’d stayed longer to really justify all that time I’d already invested.” Never. Not once.

What do you need to stop investing your time, money, and effort into? What’s causing you pain? What do you really need to let go of in your life? Where should you really invest? These aren’t rhetorical questions, so it’s worth actually answering them. The past is already gone, whether you continue or quit. The only question that matters is what you do next, and that decision should be based on where you want to go, not where you’ve been.

Further reading

• Arkes, H. R., & Blumer, C. (1985). The psychology of sunk cost. Organizational Behavior and Human Decision Processes, 35(1), 124–140.
• Kahneman, D., & Tversky, A. (1979). Prospect theory: An analysis of decision under risk. Econometrica, 47(2), 263–291.
• Staw, B. M. (1976). Knee-deep in the big muddy: A study of escalating commitment to a chosen course of action. Organizational Behavior and Human Performance, 16(1), 27–44.
• Thaler, R. (1980). Toward a positive theory of consumer choice. Journal of Economic Behavior & Organization, 1(1), 39–60.
• Kahneman, D. (2011). Thinking, Fast and Slow.