What Is The Sunk Cost Fallacy? The Sunk Cost Fallacy In A Nutshell

Business / By Gennaro Cuofano / October 17, 2023 October 18, 2023

The sunk cost fallacy describes a tendency to follow through on endeavors where time, money, or effort has already been invested. The sunk cost fallacy was first introduced by behavioral scientist Richard Thaler, who suggested in 1980 that “paying for the right to use a good or service will increase the rate at which the good will be utilised.” Psychologists Catherine Blumer and Hal Arkes expanded Thaler’s definition beyond monetary investment, defining the sunk cost fallacy as “a greater tendency to continue an endeavour once an investment in money, effort, or time has been made.”

Aspect	Explanation
Concept Overview	The Sunk Cost Fallacy, also known as the Concorde Fallacy or Escalation of Commitment, is a cognitive bias that occurs when individuals or organizations continue to invest resources (time, money, effort) into a project or decision despite evidence that it is unlikely to be successful or that the costs outweigh the benefits. The fallacy arises from the belief that the investments already made (sunk costs) justify further investments to “recoup” or justify past expenses, even when rational analysis suggests discontinuation is the better choice. It can lead to poor decision-making and is relevant in various contexts, including business, personal finance, and relationships.
Key Elements	The Sunk Cost Fallacy includes the following key elements: 1. Sunk Costs: Costs that have already been incurred and cannot be recovered, regardless of future decisions. 2. Continuing Investment: The fallacy involves making further investments, whether financial, emotional, or time-related, based on past investments. 3. Irrational Decision-Making: Individuals or organizations persist with a project or decision that no longer makes sense from a rational standpoint. 4. Emotional Attachment: Emotional attachment to past investments can intensify the fallacy.
Examples	Examples of the Sunk Cost Fallacy include: 1. Business Investments: A company continuing to allocate resources to a failing project because of the substantial investment already made. 2. Personal Finance: A person persistently gambling or investing in a declining stock to recover previous losses. 3. Education: A student completing a degree they no longer want because they’ve already invested years of study. 4. Relationships: Staying in an unhealthy relationship because of the time and emotional investment. 5. Home Renovations: Pouring more money into a home renovation project that has exceeded the budget.
Impact and Consequences	The Sunk Cost Fallacy can lead to several negative consequences: 1. Financial Loss: Continuing to invest resources in a failing endeavor can result in financial losses. 2. Opportunity Cost: Resources spent on a futile project could have been allocated to more fruitful opportunities. 3. Time Wastage: The fallacy prolongs involvement in unproductive ventures, wasting valuable time. 4. Emotional Stress: Emotional attachment to past investments can lead to stress and anxiety. 5. Strained Relationships: In personal relationships, it can lead to strained relationships and unhappiness.
Overcoming the Fallacy	To overcome the Sunk Cost Fallacy, individuals and organizations can take the following steps: 1. Rational Analysis: Evaluate the current and future costs and benefits without considering past investments. 2. Seek External Advice: Consult with impartial individuals who can provide objective perspectives. 3. Set Clear Criteria: Establish clear criteria for when to continue or abandon a project, decision, or relationship. 4. Cut Losses: Be willing to accept sunk costs as unrecoverable and make decisions based on the present and future. 5. Learn from Mistakes: View past investments as learning experiences rather than justifications for further investment.

Table of Contents

Understanding the sunk cost fallacy

To test the fallacy in a real-world scenario, Blumer and Arkes conducted an experiment.

They decided to sell discounted seasonal tickets at a theatre to determine if the amount of money spent on a ticket influenced the frequency with which people attended.

In the study, one group of attendees paid the full price of $15. Others were given a $2 discount, with a $7 discount given to a third group. The pair then recorded how many theatre shows each individual attended. They found that individuals who paid full price for their tickets went to 4.11 shows on average.

Those who received a $2 discount went to 3.32 shows, while attendees with the cheapest tickets went to 3.29 shows. Arkes and Blumer had clearly demonstrated the sunk cost fallacy in action.

Attendees who paid full price for their tickets experienced the greatest sunk costs, meaning they were motivated to spend time at the theatre to recoup the higher price of the tickets.

Why does the sunk cost fallacy occur?

The sunk cost fallacy occurs because decision-making is often irrational and based on emotions.

Indeed, failing to follow through on a decision can lead to feelings of guilt, remorse, or shame.

The fallacy is also related to commitment bias, or a tendency to remain committed to past behaviors despite those behaviors having undesirable outcomes.

commitment-bias — Commitment bias describes the tendency of an individual to remain committed to past behaviors – even if they result in undesirable outcomes. The bias is particularly pronounced when such behaviors are performed publicly. Commitment bias is also known as escalation of commitment.

By failing to understand that the resources expended will never be recovered, the individual makes decisions based on past costs and not on more rational future costs and benefits.

Lastly, sunk cost fallacy may have some relationship with loss aversion.

loss-aversion — Loss aversion is a bias, according to psychologists, where people attribute a stronger psychological weight to losses than to gains. Some psychological studies show that people place more weight on a loss, compared to a gain of the same size. This is labeled loss aversion.

This is a cognitive bias suggesting that the pain of losing something is twice as powerful as the pleasure of gaining something.

As a result, people are more likely to avoid losses than seek out gains. In the context of the sunk cost fallacy, the individual equates a loss with not following through on their decision.

How to avoid the sunk cost fallacy

Making rational decisions by ignoring the investment already made is the best way to avoid the sunk cost fallacy.

This is a simple and effective solution on paper, but even the most logical people can be influenced by the fallacy when encountering it in real-world scenarios.

Research has also shown that simply knowing about the fallacy is not enough to avoid its influence. With that said, here are a few ways to avoid the psychological trap of sunk costs:

Omit the past in decision-making

Decisions should be based on future costs and benefits by looking forward. Resist the urge to consider the cost of past actions in the decision-making process.

In business, will pivoting on a project increase customer satisfaction scores?

Will a move to the cloud enable the organization to scale and meet higher-level goals?

Reframe past costs

Instead of considering past costs as a loss, think of them as costs that got the business to where it is today.

A new tool that didn’t quite meet expectations could be reframed as a tool that supported the team until something better could be developed.

A previous relationship that ended badly could be reframed as an important learning opportunity.

This process is known as cognitive reframing, a psychological concept that may help the individual avoid making illogical decisions.

Use technology in decision-making

Wherever possible, technology should be used to make decisions because it will not be swayed by the psychological satisfaction of sticking with sunk costs.

For businesses, machine learning and predictive analytics encourage leadership to make forward-thinking decisions.

Examples of Sunk Cost Fallacy

Investments: An individual continues investing in a failing stock because they’ve already invested a significant amount and hope to recover the losses.
Education: A student pursues a degree they no longer enjoy or find useful simply because they’ve already invested years of study and money.
Business Projects: A company continues funding a project that shows no signs of success because they’ve already invested substantial resources.
Personal Relationships: Someone stays in an unhealthy or unfulfilling relationship because they’ve already invested a lot of time and effort into it.
Technology: A business persists with outdated technology or software because they’ve already invested in it, even if newer and better solutions are available.
Home Renovations: A homeowner continues investing in costly renovations for a house they no longer want to live in, simply because they’ve already spent a significant amount on improvements.
Gym Memberships: An individual continues paying for a gym membership they never use because they believe that if they stop, the money they’ve already paid will be wasted.
Business Software: A company sticks with an expensive software solution that no longer meets their needs because they’ve already invested in training and implementation.
Entertainment Events: A person attends a movie or concert they are not enjoying, simply because they’ve paid for the ticket and want to “get their money’s worth.”
Personal Projects: An individual spends countless hours on a personal project that isn’t enjoyable or fulfilling, believing that quitting would be a waste of the time already invested.
Subscriptions: Someone continues subscribing to a service they rarely use or no longer find valuable because they’ve already paid for the subscription.
Travel Decisions: A traveler stays at a disappointing hotel or destination, thinking that changing plans mid-trip would be a waste of the money spent on reservations.
Career Choices: An employee stays in a job they dislike or find unfulfilling because they’ve invested many years in the company and fear starting anew.
Training Programs: A company continues sending employees to a training program that proves ineffective because they’ve already invested in the training fees and travel expenses.
Real Estate Investments: An investor holds on to a property that is not performing well because they’ve already invested significant capital in its purchase.

Case Studies

Company/Scenario	Sunk Cost Fallacy	Case Study	Analysis
Concorde Project	Continued Investment Despite Declining Returns	The Concorde supersonic airliner project	Despite declining profitability and safety concerns, governments continued to fund and operate the Concorde for years, unable to abandon the substantial investments already made.
Movie Production	Pouring Money into a Failing Film	Multiple film productions with escalating budgets	In the film industry, studios may continue to invest in a poorly performing movie in the hope of recouping initial expenses, despite diminishing returns.
Business Expansion	Expanding a Failing Chain of Restaurants	A restaurant chain’s expansion with declining profits	Restaurant chains sometimes invest in opening new locations despite losses at existing ones, driven by the desire to make the original investment worthwhile.
Military Procurement	Maintaining and Upgrading Obsolete Equipment	Continuing upgrades to outdated military hardware	Some nations invest heavily in upgrading outdated military equipment, reluctant to admit that the original purchase was a mistake.
Software Development	Continuing Development of a Failing Software	Sunk costs incurred in a software development project	Companies sometimes persist with projects despite initial cost overruns and poor performance, hoping to recoup the initial investments.
Personal Investments	Holding onto Underperforming Investments	Individual investors refusing to sell losing stocks	Individual investors may hold onto underperforming stocks or assets, unwilling to accept a loss on their initial investment.
Political Decisions	Committing to Unpopular Policies	Politicians continuing unpopular policies	Elected officials may persist with policies that are no longer effective or popular due to the political cost of admitting mistakes.
Higher Education	Completing a Degree Despite Changing Goals	Students continuing degrees they no longer want	Some students pursue degrees they are no longer interested in, driven by the investment already made in their education.
Project Management	Overinvesting in a Flawed Project	Sunk costs in a project with insurmountable issues	Project managers may persist with projects that are not viable due to the resources already invested.
Retail Inventory	Refusing to Write Off Unsold Inventory	Retailers holding onto obsolete or unsellable items	Retailers may keep unsellable inventory in the hopes of recovering costs, even when it’s clear that the items will not sell.

Key Highlights:

Definition: The sunk cost fallacy refers to the irrational tendency to continue with an endeavor based on the past investment of time, money, or effort, even if it no longer makes sense.
Emotional Influence: The fallacy is often driven by emotions such as guilt, fear of regret, or commitment bias, leading individuals to be unwilling to let go of their past investments.
Avoiding the Fallacy: To avoid the sunk cost fallacy, individuals should focus on future costs and benefits rather than dwelling on past investments. Cognitive reframing can help see past costs as learning experiences rather than losses.
Business Decision-making: In the business context, decision-makers should base choices on the project’s potential future benefits and consider whether continuing the endeavor aligns with the organization’s long-term goals.
Technology and Objectivity: Using technology and data-driven decision-making can help businesses avoid emotional biases and make more rational choices. This includes leveraging analytics and predictive tools to assess the project’s viability objectively.

Key takeaways

The sunk cost fallacy describes a tendency to follow through on endeavors where time, money, or effort has already been invested. It was first introduced by behavioral scientist Richard Thaler in 1980.
The sunk cost fallacy occurs because decision-making is often irrational and based on emotions. It is also closely associated with commitment bias and loss aversion, with the latter describing a tendency for individuals to avoid losses rather than pursue gains.
The sunk cost fallacy can be difficult to avoid for even the most logical thinkers. Cognitive reframing and the use of technology in decision-making are two strategies individuals and businesses can use to avoid it.

Connected Thinking Frameworks

Convergent vs. Divergent Thinking

convergent-vs-divergent-thinking — Convergent thinking occurs when the solution to a problem can be found by applying established rules and logical reasoning. Whereas divergent thinking is an unstructured problem-solving method where participants are encouraged to develop many innovative ideas or solutions to a given problem. Where convergent thinking might work for larger, mature organizations where divergent thinking is more suited for startups and innovative companies.

Critical Thinking

critical-thinking — Critical thinking involves analyzing observations, facts, evidence, and arguments to form a judgment about what someone reads, hears, says, or writes.

biases — The concept of cognitive biases was introduced and popularized by the work of Amos Tversky and Daniel Kahneman in 1972. Biases are seen as systematic errors and flaws that make humans deviate from the standards of rationality, thus making us inept at making good decisions under uncertainty.

Second-Order Thinking

second-order-thinking — Second-order thinking is a means of assessing the implications of our decisions by considering future consequences. Second-order thinking is a mental model that considers all future possibilities. It encourages individuals to think outside of the box so that they can prepare for every and eventuality. It also discourages the tendency for individuals to default to the most obvious choice.

Lateral Thinking

lateral-thinking — Lateral thinking is a business strategy that involves approaching a problem from a different direction. The strategy attempts to remove traditionally formulaic and routine approaches to problem-solving by advocating creative thinking, therefore finding unconventional ways to solve a known problem. This sort of non-linear approach to problem-solving, can at times, create a big impact.

Bounded Rationality

bounded-rationality — Bounded rationality is a concept attributed to Herbert Simon, an economist and political scientist interested in decision-making and how we make decisions in the real world. In fact, he believed that rather than optimizing (which was the mainstream view in the past decades) humans follow what he called satisficing.

Dunning-Kruger Effect

dunning-kruger-effect — The Dunning-Kruger effect describes a cognitive bias where people with low ability in a task overestimate their ability to perform that task well. Consumers or businesses that do not possess the requisite knowledge make bad decisions. What’s more, knowledge gaps prevent the person or business from seeing their mistakes.

Occam’s Razor

occams-razor — Occam’s Razor states that one should not increase (beyond reason) the number of entities required to explain anything. All things being equal, the simplest solution is often the best one. The principle is attributed to 14th-century English theologian William of Ockham.

Lindy Effect

lindy-effect — The Lindy Effect is a theory about the ageing of non-perishable things, like technology or ideas. Popularized by author Nicholas Nassim Taleb, the Lindy Effect states that non-perishable things like technology age – linearly – in reverse. Therefore, the older an idea or a technology, the same will be its life expectancy.

Antifragility

antifragility — Antifragility was first coined as a term by author, and options trader Nassim Nicholas Taleb. Antifragility is a characteristic of systems that thrive as a result of stressors, volatility, and randomness. Therefore, Antifragile is the opposite of fragile. Where a fragile thing breaks up to volatility; a robust thing resists volatility. An antifragile thing gets stronger from volatility (provided the level of stressors and randomness doesn’t pass a certain threshold).

Systems Thinking

systems-thinking — Systems thinking is a holistic means of investigating the factors and interactions that could contribute to a potential outcome. It is about thinking non-linearly, and understanding the second-order consequences of actions and input into the system.

Vertical Thinking

vertical-thinking — Vertical thinking, on the other hand, is a problem-solving approach that favors a selective, analytical, structured, and sequential mindset. The focus of vertical thinking is to arrive at a reasoned, defined solution.

Maslow’s Hammer

einstellung-effect — Maslow’s Hammer, otherwise known as the law of the instrument or the Einstellung effect, is a cognitive bias causing an over-reliance on a familiar tool. This can be expressed as the tendency to overuse a known tool (perhaps a hammer) to solve issues that might require a different tool. This problem is persistent in the business world where perhaps known tools or frameworks might be used in the wrong context (like business plans used as planning tools instead of only investors’ pitches).

Peter Principle

peter-principle — The Peter Principle was first described by Canadian sociologist Lawrence J. Peter in his 1969 book The Peter Principle. The Peter Principle states that people are continually promoted within an organization until they reach their level of incompetence.

Straw Man Fallacy

straw-man-fallacy — The straw man fallacy describes an argument that misrepresents an opponent’s stance to make rebuttal more convenient. The straw man fallacy is a type of informal logical fallacy, defined as a flaw in the structure of an argument that renders it invalid.

Streisand Effect

streisand-effect — The Streisand Effect is a paradoxical phenomenon where the act of suppressing information to reduce visibility causes it to become more visible. In 2003, Streisand attempted to suppress aerial photographs of her Californian home by suing photographer Kenneth Adelman for an invasion of privacy. Adelman, who Streisand assumed was paparazzi, was instead taking photographs to document and study coastal erosion. In her quest for more privacy, Streisand’s efforts had the opposite effect.

heuristic — As highlighted by German psychologist Gerd Gigerenzer in the paper “Heuristic Decision Making,” the term heuristic is of Greek origin, meaning “serving to find out or discover.” More precisely, a heuristic is a fast and accurate way to make decisions in the real world, which is driven by uncertainty.

Recognition Heuristic

recognition-heuristic — The recognition heuristic is a psychological model of judgment and decision making. It is part of a suite of simple and economical heuristics proposed by psychologists Daniel Goldstein and Gerd Gigerenzer. The recognition heuristic argues that inferences are made about an object based on whether it is recognized or not.

Representativeness Heuristic

representativeness-heuristic — The representativeness heuristic was first described by psychologists Daniel Kahneman and Amos Tversky. The representativeness heuristic judges the probability of an event according to the degree to which that event resembles a broader class. When queried, most will choose the first option because the description of John matches the stereotype we may hold for an archaeologist.

Take-The-Best Heuristic

take-the-best-heuristic — The take-the-best heuristic is a decision-making shortcut that helps an individual choose between several alternatives. The take-the-best (TTB) heuristic decides between two or more alternatives based on a single good attribute, otherwise known as a cue. In the process, less desirable attributes are ignored.

Bundling Bias

bundling-bias — The bundling bias is a cognitive bias in e-commerce where a consumer tends not to use all of the products bought as a group, or bundle. Bundling occurs when individual products or services are sold together as a bundle. Common examples are tickets and experiences. The bundling bias dictates that consumers are less likely to use each item in the bundle. This means that the value of the bundle and indeed the value of each item in the bundle is decreased.

Barnum Effect

barnum-effect — The Barnum Effect is a cognitive bias where individuals believe that generic information – which applies to most people – is specifically tailored for themselves.

First-Principles Thinking

first-principles-thinking — First-principles thinking – sometimes called reasoning from first principles – is used to reverse-engineer complex problems and encourage creativity. It involves breaking down problems into basic elements and reassembling them from the ground up. Elon Musk is among the strongest proponents of this way of thinking.

Ladder Of Inference

ladder-of-inference — The ladder of inference is a conscious or subconscious thinking process where an individual moves from a fact to a decision or action. The ladder of inference was created by academic Chris Argyris to illustrate how people form and then use mental models to make decisions.

Goodhart’s Law

goodharts-law — Goodhart’s Law is named after British monetary policy theorist and economist Charles Goodhart. Speaking at a conference in Sydney in 1975, Goodhart said that “any observed statistical regularity will tend to collapse once pressure is placed upon it for control purposes.” Goodhart’s Law states that when a measure becomes a target, it ceases to be a good measure.

Six Thinking Hats Model

six-thinking-hats-model — The Six Thinking Hats model was created by psychologist Edward de Bono in 1986, who noted that personality type was a key driver of how people approached problem-solving. For example, optimists view situations differently from pessimists. Analytical individuals may generate ideas that a more emotional person would not, and vice versa.

Mandela Effect

mandela-effect — The Mandela effect is a phenomenon where a large group of people remembers an event differently from how it occurred. The Mandela effect was first described in relation to Fiona Broome, who believed that former South African President Nelson Mandela died in prison during the 1980s. While Mandela was released from prison in 1990 and died 23 years later, Broome remembered news coverage of his death in prison and even a speech from his widow. Of course, neither event occurred in reality. But Broome was later to discover that she was not the only one with the same recollection of events.

Crowding-Out Effect

crowding-out-effect — The crowding-out effect occurs when public sector spending reduces spending in the private sector.

Bandwagon Effect

bandwagon-effect — The bandwagon effect tells us that the more a belief or idea has been adopted by more people within a group, the more the individual adoption of that idea might increase within the same group. This is the psychological effect that leads to herd mentality. What in marketing can be associated with social proof.

Moore’s Law

moores-law — Moore’s law states that the number of transistors on a microchip doubles approximately every two years. This observation was made by Intel co-founder Gordon Moore in 1965 and it become a guiding principle for the semiconductor industry and has had far-reaching implications for technology as a whole.

Disruptive Innovation

disruptive-innovation — Disruptive innovation as a term was first described by Clayton M. Christensen, an American academic and business consultant whom The Economist called “the most influential management thinker of his time.” Disruptive innovation describes the process by which a product or service takes hold at the bottom of a market and eventually displaces established competitors, products, firms, or alliances.

Value Migration

value-migration — Value migration was first described by author Adrian Slywotzky in his 1996 book Value Migration – How to Think Several Moves Ahead of the Competition. Value migration is the transferal of value-creating forces from outdated business models to something better able to satisfy consumer demands.

Bye-Now Effect

bye-now-effect — The bye-now effect describes the tendency for consumers to think of the word “buy” when they read the word “bye”. In a study that tracked diners at a name-your-own-price restaurant, each diner was asked to read one of two phrases before ordering their meal. The first phrase, “so long”, resulted in diners paying an average of $32 per meal. But when diners recited the phrase “bye bye” before ordering, the average price per meal rose to $45.

groupthink — Groupthink occurs when well-intentioned individuals make non-optimal or irrational decisions based on a belief that dissent is impossible or on a motivation to conform. Groupthink occurs when members of a group reach a consensus without critical reasoning or evaluation of the alternatives and their consequences.

Stereotyping

stereotyping — A stereotype is a fixed and over-generalized belief about a particular group or class of people. These beliefs are based on the false assumption that certain characteristics are common to every individual residing in that group. Many stereotypes have a long and sometimes controversial history and are a direct consequence of various political, social, or economic events. Stereotyping is the process of making assumptions about a person or group of people based on various attributes, including gender, race, religion, or physical traits.

Murphy’s Law

murphys-law — Murphy’s Law states that if anything can go wrong, it will go wrong. Murphy’s Law was named after aerospace engineer Edward A. Murphy. During his time working at Edwards Air Force Base in 1949, Murphy cursed a technician who had improperly wired an electrical component and said, “If there is any way to do it wrong, he’ll find it.”

Law of Unintended Consequences

law-of-unintended-consequences — The law of unintended consequences was first mentioned by British philosopher John Locke when writing to parliament about the unintended effects of interest rate rises. However, it was popularized in 1936 by American sociologist Robert K. Merton who looked at unexpected, unanticipated, and unintended consequences and their impact on society.

Fundamental Attribution Error

fundamental-attribution-error — Fundamental attribution error is a bias people display when judging the behavior of others. The tendency is to over-emphasize personal characteristics and under-emphasize environmental and situational factors.

Outcome Bias

outcome-bias — Outcome bias describes a tendency to evaluate a decision based on its outcome and not on the process by which the decision was reached. In other words, the quality of a decision is only determined once the outcome is known. Outcome bias occurs when a decision is based on the outcome of previous events without regard for how those events developed.

Hindsight Bias

hindsight-bias — Hindsight bias is the tendency for people to perceive past events as more predictable than they actually were. The result of a presidential election, for example, seems more obvious when the winner is announced. The same can also be said for the avid sports fan who predicted the correct outcome of a match regardless of whether their team won or lost. Hindsight bias, therefore, is the tendency for an individual to convince themselves that they accurately predicted an event before it happened.

Read Next: Biases, Bounded Rationality, Mandela Effect, Dunning-Kruger Effect, Lindy Effect, Crowding Out Effect, Bandwagon Effect.

Main Guides:

Related

More Resources

About The Author

Gennaro Cuofano

Gennaro is the creator of FourWeekMBA, which reached about four million business people, comprising C-level executives, investors, analysts, product managers, and aspiring digital entrepreneurs in 2022 alone | He is also Director of Sales for a high-tech scaleup in the AI Industry | In 2012, Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy.