Sunk cost fallacy: meaning, examples and explanations

Introduction

Why do entrepreneurs continue to invest in campaigns that are structurally underperforming? Why do teams continue to work on projects when everyone feels the momentum is gone? And why is quitting often harder than continuing, even when the numbers give every reason to do so?

The same fallacy plays a role in many organizations. Not because people are irrational, but because decisions are rarely made purely rationally. Previous investments in time, money, energy and reputation unconsciously weigh heavily, while they are often completely irrelevant to future returns.

This is especially insidious for entrepreneurs and decision makers. Strategic choices often involve commitment, expectations and public views. The greater the commitment, the harder it becomes to change course, even when new information clearly demands it.

This fallacy directly impacts profitability, focus and growth opportunities. In this article, we show the bias behind it, why it is so persistent in business contexts, and how to prevent previous investments from continuing to hold future decisions hostage.

What is the sunk cost fallacy?

Sunk cost fallacy is the tendency to proceed with a decision or investment because of previously incurred costs in time, money or effort, when rationally these costs should no longer play a role in the current decision (Arkes & Blumer, 1985).

In essence, sunk cost fallacy revolves around confusing the past with the future. Previously incurred costs are irreversible; they cannot be recovered no matter what choice you make now. Yet people allow these "sunk costs" to factor into decisions that really should only be based on expected future returns and risks.

Especially in business contexts, this fallacy is persistent. The bigger the previous investment, the harder it becomes to stop. Not because continuing is rationally the best choice, but because quitting feels like acknowledging loss. Economist Richard Thaler already showed that people tend to continue with products, services or projects longer when they have paid for them in advance, even if the value added declines (Thaler, 1980).

Sunk cost fallacy is therefore seen as a mental fallacy: previous investments do not justify future decisions. In many cases, quitting, however painful, is rationally the better choice. The well-known proverb "better half way than whole way" sums up this principle well.

The bias is also known as the Concorde effect, named after the supersonic aircraft in which governments continued to invest billions for years despite it being clear early on that the project would never become profitable.

Why do we think this way?

Decision making is rarely fully rational. Emotions play a major role, especially when decisions are public or involve personal responsibility. Quitting can evoke feelings of failure, loss of face or reputational damage. Continuing then feels safer, even if the numbers contradict that.

Sunk cost fallacy is closely related to other cognitive biases, such as the endowment effect in which we value more what we already own and loss aversion, in which loss psychologically outweighs gain. Together, these mechanisms cause people to stick with decisions even when new insight no longer provides a rational basis for them.

Sunk cost versus opportunity cost: a crucial difference

A common mistake in decision-making is to confuse sunk costs and opportunity costs. While the very distinction between the two is essential for rational decisions.

Sunk costs are costs that have already been incurred and cannot be reversed. Think spent marketing budget, development time of a product or investment in a project that is already underway. These costs are irreversible and therefore should no longer be a factor in what to do next.

Opportunity costs are precisely about the future. These are the costs of not choosing the best alternative use of your time, money or resources. In other words, what will you lose if you continue with the current choice?

In rational decision-making, only opportunity costs should be relevant. Yet people are structurally guided by sunk costs, continuing to invest in options that yield less than available alternatives.

In a business context, this means, for example:

• Continuing a loss-making campaign because a lot of budget has already been put into it, when that same budget is paying off better elsewhere.
• Continuing to develop a product line because months of work have gone into it, while another product has more growth potential.
• Sticking to a strategy because it was publicly announced, despite better new insights.

The core fallacy is not that people incur costs, but that they make decisions based on costs that can no longer be influenced. Effective decision makers therefore focus not on what it cost to get here, but on what the next step is worth from today.

Explicitly distinguishing sunk costs and opportunity costs helps remove emotion from decision-making and base choices on expected future value rather than past stakes.

Examples of sunk cost fallacy in practice

In practice, sunk cost fallacy manifests itself primarily in everyday business decisions, where previous investments unconsciously outweigh future opportunities.

Marketing and growth

A classic example is a marketing campaign that structurally underperforms. Despite disappointing results, the campaign is continued because a lot of budget, creation and time has already been put into it. Stopping feels like a waste, while continuing rationally may mean additional losses.

The right question should not be: "How much have we already spent on this?" but rather, "What does each additional euro from now on yield relative to alternatives?"

Product development and innovation

Sunk cost fallacy often plays a big role in product development. Teams continue to invest in features or products that have been worked on for months, even when market signals indicate that demand is limited. The earlier development costs are seen as a reason to persevere, while they no longer affect future viability.

This frequently leads to so-called "zombie products": initiatives that persist because stopping is psychologically harder than continuing.

Investments and strategic choices

The bias is also evident in investment decisions. Entrepreneurs cling to an investment because they are already "too deep into it," even when new information shows that returns are structurally disappointing. The original decision is defended rather than revised.

In extreme cases, this leads to escalation of commitment: more and more resources are used to justify a previous decision, rather than to create value.

Personnel and organization

The sunk cost fallacy doesn't just play out in financial decisions. This fallacy also occurs in personnel choices. A role or partnership is continued because a lot of time has already been invested in onboarding, training or mentoring, while structurally the match turns out not to work.

Rationally, the question should be whether the collaboration adds value as of today, not how much effort it took to get here.

Why is the sunk cost fallacy so persistent?

Sunk cost fallacy is not caused by a lack of intelligence or data, but by how our brain deals with loss, responsibility and consistency. Especially among experienced entrepreneurs and decision makers, this bias can be strong because previous choices are often public, strategic and emotionally charged.

Loss feels heavier than profit

A major cause is loss aversion: losses feel psychologically heavier than comparable gains. Quitting a project means explicitly acknowledging the loss. Continuing keeps open the possibility that the loss will still be "made up," even if that chance is rationally small.

This makes quitting more emotionally painful than continuing, even when continuing is objectively worse.

Accountability and reputation

For business owners and managers, reputation and consistency play a major role. Decisions are often visible to employees, partners or investors. Revising a previous choice can feel like failure, while persevering is seen as steadfastness.

This imperceptibly shifts the focus from value creation to self-justification: defending the original decision becomes more important than making the best next decision.

Escalation of commitment

When previous investments are used as an argument to proceed, escalation of commitment often occurs. Each additional investment increases the psychological pressure to persevere. The result is a vicious cycle in which more and more resources are used to justify a previous choice.

The longer this goes on, the harder it becomes to look at alternatives objectively.

The illusion of control

Finally, there is the belief that extra effort can still tilt the outcome. Investing more time, money or attention creates a sense of control over the outcome. In reality, extra effort rarely changes the underlying assumptions on which the decision is based.

So the sunk cost fallacy does not arise from stupid decisions, but from human mechanisms that are actually reinforced in complex, uncertain situations.

How do you avoid the sunk cost fallacy?

Completely eliminating the sunk cost fallacy is not realistic. You can, however, frame decision-making so that previous investments have less influence on future choices. This does not require more willpower, but better structures.

Focus decisions on future value

The key countermeasure is to explicitly disconnect past and future. For every decision, the central question should be: what is this choice expected to deliver from today?

Previously incurred costs are irreversible and therefore no longer a valid input to the decision. By consistently focusing on expected returns, risks and alternatives, you shift attention from emotion to value.

Work with predefined stopping criteria

Successful entrepreneurs determine not only when to proceed, but also when to stop. By establishing measurable stopping criteria in advance, for example, in marketing campaigns, product development or investments, you avoid justifying decisions after the fact based on previous commitment.

These criteria force evaluation based on current performance rather than historical effort.

Make alternatives explicit

The sunk cost fallacy flourishes when alternatives remain vague. By explicitly naming what you would do with the same resources if you had to choose again today, you make opportunity costs visible.

A simple but effective question here is, "Would I make this decision again if I started from scratch today?"

Involve an independent view

Decisions involving a lot of emotion or reputation are ideally suited for external or independent review. Someone not involved in the original choice is less affected by psychological justification and looks at the current situation more objectively.

This could be a colleague, a consultant or a data-driven evaluation.

Use data as a correction mechanism, not an excuse

Data only helps when it is used to test assumptions, not to defend previous decisions. By evaluating regularly on predetermined KPIs and building in decision moments, data acts as a counterweight to emotional escalation.

Decision-making thus becomes less a matter of sustaining and more a matter of adjusting or stopping.

Conclusion: better decisions require letting go

The sunk cost fallacy shows how easily past investments can distort future decisions. Not because entrepreneurs or decision makers do poor math, but because loss, accountability and consistency are deeply human. Especially in complex environments with uncertainty and pressure, it becomes difficult to let go of the past.

Effective decision-making is therefore not about persistence, but about daring to recalibrate. Basing choices on expected future value and not on what it has already cost creates room for focus, return and growth. In this light, quitting is not a failure, but a strategic decision.

Want to make structurally better marketing choices?

At Tasmanic, we help business owners and decision makers make decisions based on data, insight and realistic expectations, not sunk costs or gut feelings. Whether it's marketing budgets, growth strategies or optimization of existing channels, we help you make choices that look ahead.

Check out our approach as a marketing agency and discover how we combine strategy, data and behavioral insights for sustainable growth.

Resources

Arkes, H. R., & Blumer, C. (1985). The psychology of sunk cost. Organizational Behavior and Human Decision Processes, 35(1), 124-140. https://doi.org/10.1016/0749-5978(85)90049-4

Thaler, R. (1980). Toward a positive theory of consumer choice. Journal of Economic Behavior & Organization, 1(1), 39-60. https://doi.org/10.1016/0167-2681(80)90051-7

Kahneman, D., & Tversky, A. (1979). Prospect theory: An analysis of decision under risk. Econometrica, 47(2), 263-291. https://doi.org/10.2307/1914185

Kahneman, D. (2011). Thinking, fast and slow. New York, NY: Farrar, Straus and Giroux.

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. https://doi.org/10.1016/0030-5073(76)90005-2