Sunk Cost Fallacy n.
The academic literature most commonly refers to this as the sunk cost effect. The term sunk cost fallacy is the widely used popular label for the same phenomenon.
The definition
Sunk Cost Fallacy is the cognitive bias that causes decision-makers to continue investing time, money, or effort in a failing course of action because of resources already spent, rather than future prospects. Rooted in loss aversion and negative affect, the bias anchors decisions to irrecoverable past outlays and systematically compounds losses through escalating commitment.
The mechanism
The sunk cost effect is the greater tendency to continue an endeavour once an investment of money, effort, or time has been made 1. The psychological justification is a desire not to appear wasteful: abandoning a losing project feels like admitting the original investment was a mistake, so decision-makers continue rather than accept a certain loss. Prospect theory offers a complementary account. Facing a guaranteed loss, people shift towards risk-seeking behaviour, committing additional resources in the hope of recovering what has been lost 2. The result is escalating commitment to a path whose forward-looking value no longer justifies the cost.
Affect mediates the effect more directly than cognitive analysis alone. Dijkstra and Hong demonstrated that integral emotional responses tied to the specific decision context drive the bias, and that participants who were prompted to justify their decision showed reduced negative affect and stronger resistance to sunk cost reasoning 4. High cognitive load amplifies the bias further: when deliberative reasoning is impaired, affect-driven responses dominate, producing systematically worse decisions. This dual-process basis explains why fatigue, time pressure, and distraction reliably increase susceptibility to the fallacy.
In practice
The fallacy appears whenever past investment crowds out forward-looking evaluation.
Worked example
A product team has spent eighteen months building a software feature. Adoption data show users rarely engage with it, and the maintenance cost now exceeds the feature's measured value. The team continues to expand it nonetheless, reasoning that abandoning the work would make the original development time a waste. Each additional sprint deepens the misallocation without improving the expected outcome.
The eighteen months are irrecoverable regardless of the decision made today; the only question is whether to commit further resources to a low-return path.
Why it matters
A meta-analysis of 98 effect sizes across economic decision types confirmed a robust and generalisable sunk cost effect 3. The effect is not confined to hypothetical scenarios: Arkes and Blumer's field evidence showed that theatre subscribers who paid more for season tickets attended significantly more performances over six months, demonstrating the bias operates on real consumption behaviour 1. The review also found that older adults show lower susceptibility than younger adults, suggesting the bias attenuates with experience and deliberative capacity.
In organisational settings, the stakes compound because accountability escalates the effect rather than correcting it. Staw demonstrated that individuals with personal responsibility for a failing investment committed significantly greater resources to it than those who were not responsible for the initial decision 2. The original decision-maker is therefore the person least well placed to evaluate continuation objectively, which is why structured escalation reviews with independent evaluators are a proven structural mitigation.
Questions of record
What is a real-world example of the sunk cost fallacy?
A common example is continuing to fund a failing project because of the budget already allocated to it, rather than evaluating whether future spending can produce positive returns. Arkes and Blumer documented the pattern in theatre audiences: subscribers who paid more for tickets attended more performances, even when attendance had no additional cost 1.
How does the sunk cost fallacy differ from loss aversion?
Loss aversion is the general tendency to weight losses more heavily than equivalent gains. The sunk cost fallacy is a specific downstream consequence: because abandoning a failing investment feels like crystallising a loss, loss aversion drives continued commitment to recover what cannot be recovered 1. Sunk cost behaviour is loss aversion applied to irrecoverable past expenditure.
Why do emotions make the sunk cost fallacy worse?
Negative emotional responses tied to a failing investment directly amplify sunk cost reasoning. Dijkstra and Hong showed that participants experiencing higher negative affect were more susceptible to the bias, and that prompting explicit justification reduced both the emotional response and the tendency to continue. Under cognitive load, deliberative reasoning is suppressed and affect-driven continuation dominates 4.
How can you overcome the sunk cost fallacy?
Explicitly justifying a continuation decision reduces negative affect and weakens sunk cost bias 4. Structurally, removing the original decision-maker from continuation reviews eliminates the accountability amplification effect 2. The core discipline is evaluating each decision solely on forward-looking expected value, treating past costs as fixed and irrelevant to the choice ahead.