What Is the Sunk Cost Fallacy? | Definition & Examples

The sunk cost fallacy is the error of persisting with a bad decision because of the misconception that changing course would invalidate previous time, money, or effort invested.

As an informal logical fallacy, the sunk cost fallacy is a type of flawed argument. As a cognitive bias, the sunk cost fallacy is a faulty decision-making process.

Reasoning that is based on the sunk cost fallacy fails to take into account that past investments of time, money, or effort are irretrievable (i.e., they are “sunk costs”). Persisting in an undesirable course of action can lead to further wasted resources, as well as missed opportunities.

What is the sunk cost fallacy?

The sunk cost fallacy is the mistake of committing to a bad decision to avoid facing the reality of lost time or resources. It is based on the often-mistaken belief that persistence will make previous investments of time or resources worthwhile eventually.

Decisions based on the sunk cost fallacy can affect many areas of life, from financial investments to mundane decisions like finishing a boring novel.

The term “sunk cost” comes from the study of economics, where it refers to unrecoverable capital that has been lost or spent. Outside of economics, a sunk cost can be anything that has been irreversibly lost, including time, effort, money, and other resources.

Common examples of sunk cost fallacies that can influence our life choices include the following:

• Refusing to cut losses in a failed investment, despite clear indications that it will never recover
• Remaining committed to a dead-end job based on the mistaken belief that if you leave, the time and effort spent there will have been wasted
• Failing to end a toxic friendship or relationship because you have already spent significant time and emotional energy on that person
• Continuing to donate or volunteer for an organization that does not match your current values based on the amount of time and money you have already given

Why is the sunk cost fallacy an issue?

The sunk cost fallacy leads to irrational behaviors that can be costly. The fallacy focuses on past mistakes and fails to take into account current and future opportunities.

Even when the most relevant and up-to-date information suggests that the initial investment will never be recovered, the sunk cost fallacy encourages the false belief that remaining committed to a past investment will eventually restore what has been lost.

The sunk cost fallacy often compounds the losses we have already experienced by inspiring us to “throw good money after bad” in an investment or waste significantly more time than necessary on a job, relationship, or other choice that we have come to regret.

Why does the sunk cost fallacy occur?

The sunk cost fallacy is a cognitive bias when it affects internal decision-making and a logical fallacy when used to persuade others. It is an error that people tend to make when emotions, especially fear, override logic.

The following factors can help explain why the sunk cost fallacy occurs:

• Loss aversion: It is painful to accept significant losses of time, money, effort, and emotional investments. Loss aversion, rooted in fear, is therefore a powerful motivator. This fear tends to overshadow the consideration of opportunity costs—the potential gains foregone by persisting in suboptimal decisions.
• Framing effect: The sunk cost fallacy portrays changing one’s mind in a negative light, as if past losses and mistakes weren’t real until they were acknowledged. However, an evidence-based change of heart can be reframed in a more accurate, positive light as an act of optimizing resource usage, learning from mistakes, and embracing new opportunities.
• Social pressures: External expectations and social pressures to follow through on commitments can contribute to the sunk cost fallacy. People may fear judgment or criticism for changing course.
• Optimism bias: Individuals may hold an optimistic bias, believing that future outcomes will improve, even when evidence suggests otherwise. This optimism can fuel the desire to persist with a failing investment.
• Cognitive dissonance: The discomfort of admitting that a past decision was flawed can create cognitive dissonance. To reduce this discomfort, individuals may choose to stand by a decision even when it no longer makes sense.

Sunk cost fallacy example

The sunk cost fallacy reveals a tendency to prioritize historical commitments over present and future considerations. This applies to our feelings about wasting other people’s time and resources, as well as our own.

How to overcome the sunk cost fallacy

The following techniques can help counteract the influence of the sunk cost fallacy:

• Reevaluate objectives and resources: Define your goals and objectives based on current circumstances. Focus on what resources you still have and what you aim to achieve in the present and future rather than clinging to past investments.
• Consider opportunity costs: Reflect on the potential gains and benefits that could be missed by persisting in a suboptimal decision. Consider the opportunities that may be forfeited through inaction.
• Embrace flexibility: Recognize that adaptability is a strength, not a sign of failure. Being open to learning and changing allows for more responsive and strategic decision-making.
• Decouple emotions from investments: Acknowledge the pain of loss, but consciously separate emotions from the decision-making process. Objectivity is crucial in evaluating the current situation.
• Seek external perspectives and data: Resist the temptation to make emotional decisions by consulting with mentors or advisors who can offer objective insights. Evaluate external factors such as changes in the market, technology, or personal circumstances, that may influence the current viability of a past decision.

Frequently asked questions about sunk cost fallacy

What is the difference between the sunk cost fallacy and escalation of commitment?

The sunk cost fallacy can lead to an escalation of commitment (or commitment bias).

• The sunk cost fallacy is the mistake of remaining committed to a past decision based on the misconception that the costs already incurred can be recovered.
• An escalation of commitment is the act of increasing the resources or conviction invested in a failed course of action.

An escalation of commitment stems from fallacious sunk cost reasoning and entails committing even more time, money, effort, emotions, or conviction to a failed decision in a futile attempt to recover what has been lost.

What are common types of fallacies in research?

Logical fallacies that are common in research include the following:

• Hasty generalization: Drawing broad and general conclusions from a small or unrepresentative sample of data
• Fallacy of composition: Assuming that what is true of the parts must be true of the whole
• Post hoc fallacy: Inferring that simply because one event followed another, the first event must have caused the second event
• Ecological fallacy: Forming conclusions about individuals based on group-level data
• False cause fallacy: Inferring a cause-and-effect relationship between two variables when none exists