Why we throw good money after bad — and how to recognise when past investments are clouding your judgement today.
What Is the Sunk Cost Fallacy?
A sunk cost is any investment of time, money, or effort that has already been made and cannot be recovered. The fallacy occurs when we allow those irrecoverable costs to influence future decisions — staying in a bad relationship because of "all the years we've put in", or watching a terrible film to the end because we paid for the ticket.
The Psychology Behind It
Loss aversion, first described by Kahneman and Tversky, is the cognitive engine driving the sunk cost fallacy. Losses loom roughly twice as large as equivalent gains in the human mind. Abandoning a project feels like confirming a loss; continuing it feels like keeping the door to recovery open.
How to Escape the Trap
The antidote is forward-looking analysis. Ask: if I had not yet made this investment, would I choose to start now? If the answer is no, the rational move is to stop — regardless of what you've already spent.
Practical Applications
From corporate strategy to personal finance, recognising sunk costs is one of the highest-value thinking skills you can develop. The organisations and individuals who thrive are those who can write off the past and allocate resources purely on future expected value.
