What is the sunk cost fallacy and how to avoid it?
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Published 13 February 2025
https://ie.indeed.com/career-advice/career-development/sunk-cost-fallacy
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The sunk cost fallacy refers to additional investments individuals or businesses make even though the investments are irretrievable. If you have already made a decision that has incurred a cost for your company, then you can refer to this price as 'sunk'. Learning about what the sunk cost fallacy is can help you understand the implications of such a term and what it means in a business setting.
In this article, we look at what this concept is, how it happens and what steps you can take to overcome this problem within your own business.
Key takeaways:
The sunk cost fallacy refers to a situation where companies continue to invest in a poor decision, even after realising that the initial investment is no longer recoverable.
Examples of sunk cost fallacies in business can include investing more time into a failing project, pouring more money into an unprofitable venture, or spending energy trying to fix an ineffective business process.
To avoid the sunk cost fallacy, it's important to remain objective when evaluating decisions and investments, and to encourage an organisational culture that is open to trying new ideas rather than sticking to failing projects.
Understanding a sunk cost fallacy
If you want to better understand a sunk cost fallacy, learning about what a sunk cost is can help you understand the implications and effect this fallacy can have on your business. The sunk cost fallacy is a common cognitive bias in which individuals continue a course of action primarily because of the past investments they've already made—be it time, emotional energy, or good money—rather than considering the actual value or consequences of continuing.
A sunk cost refers to an investment that you have made, that you can no longer revise, retrieve or manage in any way. This means that any money or assets that you have invested in this decision are no longer yours, and you cannot simply take them back if you believe your investment is no longer viable. A sunk cost can be monetary, emotional, or involve other assets. When you're managing a business, you want to make informed and sound business decisions as much as you can. Sometimes, your past decisions and future decisions and investments may not go as positively as you might have wished. When your costs aren't recoverable and the investment goes badly, you may want to abandon your investment and accept your loss. Rather than wasting more valuable time and energy on a project that yields no positive results. Once you invest more resources into one of these decisions, you create a sunk cost fallacy.
When might this occur?
A sunk cost fallacy refers to the mistake that you make by further investing into an already poor decision, resulting in a waste of resources like time and money. This tendency is rooted in the psychology of sunk cost, where loss aversion makes it difficult for a decision maker to let go, even when it’s clear that changing direction would lead to better decisions. While certain sunk costs, such as equipment, training and rent, are inevitable, others are not. Often, companies or private individuals can continue to invest in a poor-yield project simply because they have always done so. These decisions may not be good for your well-being, but to discontinue may require a rational decision-maker; some people have a greater tendency towards it than others. If you want to make sure that your investments maintain their positive results, constantly re-evaluate and research your projects, making sure it is a rational choice and ensuring you get the best return possible. By using a sunk cost fallacy, you can cause further harm to your investments and business. There are various resources that you can invest into a sunk cost that you might be able to put to better use elsewhere. Here are some key examples of the possible resources you may expend in this process and where an organisation might invest into the sunk cost fallacy:
Time
A sunk cost fallacy might occur when you invest too much time and effort into your decision before you realise that all of this extra work you're putting in won't further your goals. Even when people know that a larger time investment into this project cannot help them, they might find it hard to abandon the project because of the effort they have already invested in it. As a simple and common example of a person investing time into an already sunk cost, you can look at a student halfway through their four-year bachelor's degree. If this student decides they dislike their area of study and that they aren't going to work in the field after they graduate, then committing further time to that degree is essentially a waste of time. Many people might feel compelled to finish their degree, even so, especially if they have invested two or three years into the degree already. This is a prime example of a sunk cost fallacy.
Related: What are fixed costs? Definition, importance and examples
Money
Another area where sunk cost fallacies are prevalent involves significant monetary investments. If you have already invested a large amount of money into a project, suddenly abandoning it and 'losing' your money might seem like the wrong decision. Since you have already invested the money and have no prospect of regaining it, either way, abandoning a project like this might be the best decision. Simply investing more and more money into a project isn't likely to make a bad investment turn into a good one, no matter how much capital you have invested in your decision. For example, imagine that you have bought a house in an area that you believed you might be able to flip for a profit. Buying a house usually requires a significant investment upfront, which is an immediate sunk cost that you cannot retrieve. If you then decide to renovate and try to upgrade the house with the idea of later selling it for profit, you invest more money. If you then learn that this enterprise cannot be profitable for you, and you continue to invest, then that is a sunk cost fallacy, and ripples to a sunk cost effect.
Energy
Implementing any new decision, whether it involves technology, invested money or just lots of time, means that you're investing large amounts of energy into making sure it works. When investing these factors into a project, you might see them as reasons to continue investing in a project and not just abandon it. Having previously invested a large amount of energy, you might think that it's a waste to have used all of that energy for nothing. This means that you're actively participating in the sunk cost fallacy by wasting even more energy on a project that has no expected return. As an example of this, imagine that your company is trying to train employees in the use of a new piece of software. As the software is technical and complicated to understand, this training is taking a large amount of time and energy on the behalf of the trainers in instructing the employees. Once everyone knows how to work the software and your company uses the program throughout its business, they find that it's ineffective and broken. Rather than change software and re-train, they continue to use the ineffective software due to the effort involved in making it work. This disrupts the status quo of the business and adds to future costs.
