Sunk Cost Fallacy: When to Quit and When to Persist

A sunk cost is any expenditure - money, time, effort, emotion - that has already been incurred and cannot be recovered. The sunk cost fallacy is our tendency to continue an endeavour because of what we've already invested, rather than evaluating it purely on its future prospects.

The term entered mainstream economics through Richard Thaler's 1980 paper Toward a Positive Theory of Consumer Choice, and was rigorously demonstrated in a now-classic 1985 study by Hal Arkes and Catherine Blumer (The Psychology of Sunk Cost, Organizational Behavior and Human Decision Processes). Arkes and Blumer showed that people who had paid more for a theatre subscription were significantly more likely to attend shows in bad weather than people who had paid less - even though the ticket price was already gone in both cases.

Rational decision-making demands that we ignore sunk costs entirely. Every decision should be based on expected future outcomes - what economists call the marginal analysis. If you're familiar with expected value thinking, you'll recognise this immediately: the correct question is always "what's the expected value of continuing versus stopping from this point forward?"

But our brains don't work that way. We carry the weight of past investment into every forward-looking decision, and it warps our judgement in predictable ways.

Three psychological mechanisms drive the sunk cost fallacy:

Loss Aversion

Daniel Kahneman and Amos Tversky demonstrated that losses hurt roughly twice as much as equivalent gains feel good. When we abandon a project, we crystallise the loss - we have to admit the money is gone. Continuing lets us maintain the comforting fiction that the investment might still pay off. This connects directly to how we misjudge probabilities - we overweight the pain of certain loss against an uncertain future gain.

Commitment Escalation

Once we've publicly committed to a course of action, abandoning it feels like admitting we were wrong. The more we've invested, the harder it becomes to walk away, because the implied admission of error grows proportionally. Psychologists call this escalation of commitment - each additional investment makes the next one more likely, not less. Barry Staw's 1976 paper Knee-Deep in the Big Muddy documented this pattern in managerial decision-making, and it has been replicated countless times since.

The Waste Narrative

We have a deep-seated aversion to "waste." If you quit a book halfway through, those hours feel wasted. If you abandon a renovation, the money spent so far feels thrown away. But this confuses two different things: the resources are gone regardless. The only waste that matters is the future time, money, or effort you'd pour into something that isn't working.

How Vivid Memories Make It Worse

There's also a perception layer to this trap. The more vividly we remember the original investment - the meetings, the late nights, the cheque written - the heavier it weighs on our judgement. This is closely linked to the availability heuristic: vivid, easily recalled details disproportionately shape our decisions, even when they're logically irrelevant. The lavish launch party for a failing product should have no bearing on whether to fund it for another year. Our brains disagree.

The Concorde Fallacy

Perhaps the most famous example - so famous that economists sometimes call the sunk cost fallacy the "Concorde fallacy." By the mid-1970s, both the British and French governments knew that Concorde would never be commercially viable. The development costs had ballooned far beyond projections, and the market for supersonic passenger travel was a fraction of what had been forecast.

But both governments kept funding the project. Why? Because they'd already spent billions. Walking away would have meant admitting that the entire investment was a loss. So they poured in more money, eventually spending over £1.3 billion (roughly £11 billion in today's money) on an aircraft that never turned a profit.

The rational calculation was straightforward: the money already spent was gone. The only question was whether future spending would yield a positive return. The answer was clearly no - but the sunk costs made it politically impossible to stop.

The Vietnam War

Robert McNamara, US Secretary of Defence during the Vietnam War, later acknowledged that escalation of commitment played a central role in prolonging the conflict. As casualties mounted, each loss became a reason to continue - "we can't let their sacrifice be in vain" - rather than a signal to reassess the strategy.

By 1967, internal analysis showed the war was likely unwinnable under the current approach. But withdrawal would have meant that the 20,000 American lives lost by that point had been "for nothing." So the commitment deepened, eventually costing over 58,000 American lives and millions of Vietnamese casualties.

Business: The Product That Won't Die

Every large company has at least one product that should have been killed years ago. Microsoft's Windows Phone consumed billions over nearly a decade. Google poured resources into Google+ long after it was clear the social network had failed to gain traction.

The pattern is remarkably consistent: a major investment is made, early results disappoint, but instead of cutting losses, leadership authorises more funding. Each round of additional investment raises the emotional stakes of abandonment.

The sunk cost fallacy isn't confined to governments and corporations. It shapes deeply personal decisions - and several everyday examples are so universal they appear in almost every textbook on the topic:

The Casino Chip Effect

Casinos have understood sunk cost psychology for over a century, which is why they replace your money with chips at the door. Once cash becomes coloured plastic, it stops feeling like real money - and any chips you've already lost feel like sunk investment in "the night." Players routinely keep betting after losses they would never have authorised at the start of the evening, chasing what's gone rather than evaluating whether the next bet has positive expected value.

This is why experienced gamblers fix their stake before sitting down and treat anything beyond it as off-limits. They are pre-committing past the point where the sunk cost fallacy can hijack them - a discipline that mirrors the Kelly criterion's emphasis on bet sizing based on current edge, not historical balance.

The Bad Film You Won't Walk Out Of

You're forty minutes into a film. It's clearly a dud. The plot is incoherent, the dialogue is wooden, and you're checking your watch. Yet most people stay to the end - because they paid for the ticket.

The ticket money is gone whether you stay or leave. The only question is whether the next ninety minutes are better spent in the cinema or doing literally anything else. The same logic applies to bad books, half-finished podcasts, and overlong meetings.

Buffet Belly

At an all-you-can-eat buffet, people routinely eat past the point of comfort because they want to "get their money's worth." The price is already paid. The only question is whether each additional plate makes the evening better or worse - and after the third helping, the answer is reliably worse.

Careers and Relationships

Careers: "I've spent five years building expertise in this field - I can't switch now." Those five years are gone. The question is whether the next five years are better spent here or elsewhere.

Relationships: "We've been together for eight years - I can't just throw that away." The time together has already been spent. The only question is whether the relationship makes your future better or worse.

Education: "I'm two years into this degree and I hate it - but I can't quit now." You absolutely can, and sometimes should. The tuition already paid is irrelevant to whether finishing the degree has positive expected value.

Possessions: That gym membership you never use, the expensive kitchen gadget gathering dust, the half-finished online course. We keep paying, keep storing, keep feeling guilty - all because of what we've already spent.

In each case, the sunk cost creates a powerful emotional anchor that distorts our assessment of future options.

The sunk cost fallacy is particularly destructive in investing. You buy a stock at £50. It drops to £30. Rather than evaluating whether the stock is worth buying at £30 right now, you hold on, waiting to "get back to even."

This is irrational - and it is a textbook case of anchoring bias: your purchase price is mathematically irrelevant to the stock's future prospects. The only question is: given what you know today, is this stock a better use of your capital than the alternatives?

It also stacks dangerously with confirmation bias in investing - once you're holding a losing position, you start unconsciously filtering news and analysis, weighting bullish takes more heavily than bearish ones to justify staying in. The combination of sunk-cost reasoning and confirmation bias is one of the main reasons retail investors hold losers far too long.

Think about it using expected value. If the stock has a 40% chance of recovering to £50 and a 60% chance of falling to £20, the expected value of holding is:

EV = (0.4 × £50) + (0.6 × £20) = £20 + £12 = £32

If selling at £30 and reinvesting elsewhere has better expected value, you should sell - regardless of what you originally paid.

Professional traders understand this intuitively. They evaluate positions based on current information and forward-looking probability, not on their entry price. The Kelly criterion, for instance, sizes bets based entirely on the current edge and odds - historical cost doesn't enter the formula.

The amateur investor, by contrast, sorts their portfolio into "winners" (above purchase price) and "losers" (below), selling winners and holding losers. This behaviour, known as the disposition effect (documented by Hersh Shefrin and Meir Statman in 1985), is the sunk cost fallacy in action.

Understanding the sunk cost fallacy doesn't mean you should abandon everything the moment it gets difficult. Sometimes persistence is exactly the right call. The key is distinguishing between rational persistence and sunk-cost-driven stubbornness.

Persistence is rational when:

New information still supports the original thesis. If you started a business based on a market opportunity, and the opportunity is still real - even if progress is slower than hoped - continuing may be justified. The sunk cost fallacy only applies when you're continuing because of past investment, not despite it.

Switching costs are genuinely high. Sometimes the cost of abandoning and starting fresh exceeds the cost of pushing through. This isn't a sunk cost argument - it's a legitimate forward-looking calculation about transition expenses, lost momentum, and rebuilding time.

You're in a temporary dip, not a structural decline. Seth Godin's The Dip captures this well: most worthwhile pursuits have a difficult middle phase. The question is whether you're experiencing a predictable dip that rewards persistence, or a dead end that never gets better.

The option value of continuing is high. Some endeavours create valuable options even if the primary goal fails. A startup that's struggling might pivot successfully. A degree you're unsure about might open doors you can't foresee.

The critical test: are you evaluating the future based on forward-looking evidence, or are you clinging to the past? A Bayesian thinker updates their beliefs as new evidence arrives. If the evidence keeps pointing the same way - this isn't working - the rational response is to update your beliefs and act accordingly.

The best defence against the sunk cost fallacy is to decide your quitting conditions before you begin, while you're still thinking clearly.

Pre-commitment strategies include:

Setting explicit kill criteria. Before launching a project, define the conditions under which you'll stop. "If we haven't reached 1,000 users by month six, we shut it down." "If the stock drops below £25, I sell regardless." These pre-defined triggers bypass the emotional escalation that happens in the moment.

Time-boxing investments. Rather than open-ended commitments, allocate fixed time or budget windows. "I'll give this side project three months and £2,000. At the end, I'll evaluate from scratch."

Keeping a decision journal. Writing down why you committed to something - the evidence, the assumptions, the expected outcome - makes it possible to reassess later without revisionist memory. When the data turns sour, you can compare reality against the original thesis instead of an inflated retroactive version of it. Decision journals are arguably the single most effective sunk-cost antidote, because they force the comparison to be evidence-based rather than emotional.

Scheduling regular reviews. Build in periodic reassessment points where you explicitly ask: "Knowing what I know now, would I start this today?" Calendar these in advance - don't wait until you feel like reassessing, because that feeling comes too late.

Appointing a devil's advocate. Ask a trusted friend, colleague, or adviser to challenge your reasoning. Tell them: "I need you to argue for quitting, and I'll argue for continuing. Let's see which case is stronger." This externalises the conflict and reduces the ego investment.

These approaches work because they separate the decision from the emotion. You're effectively making a pact with your future, rational self to overrule your future, biased self.

The sunk cost fallacy is, at its core, a failure to update beliefs in response to evidence. A Bayesian approach to everyday decisions provides a natural antidote.

When you start a project, you have a prior belief about its chances of success. As time passes, you gather evidence: user numbers, revenue figures, market signals, personal satisfaction. Each piece of evidence should update your belief.

If you started with 70% confidence that a venture would succeed, but six months of data have been consistently disappointing, your updated probability should be significantly lower. The sunk cost fallacy is what happens when you refuse to let that update happen - when you cling to the original 70% because acknowledging the drop means acknowledging the loss.

A useful discipline: after each major milestone or review point, explicitly state your updated probability of success. Write it down. If the number keeps falling, at some point it crosses a threshold where the expected value of continuing becomes negative. That's your signal.

This connects back to a fundamental principle of probabilistic thinking: holding your beliefs with appropriate uncertainty and being willing to change them when the evidence demands it. The sunk cost fallacy is certainty masquerading as commitment - the refusal to admit that reality has diverged from the plan.

The sunk cost fallacy is one of the most common and costly cognitive biases we face. It turns past spending into future chains, keeping us locked into failing investments, dying projects, and unfulfilling paths.

Recognising it is the first step. The next is building the mental habits and practical frameworks to counteract it:

• Evaluate every decision based on expected future value, not past expenditure
• Apply the fresh-start test: would you choose this if you were starting today?
• Set kill criteria before emotional investment clouds your judgement
• Use Bayesian updating to honestly track whether the evidence supports continuing
• Remember that the base rates for most ventures are sobering - most startups fail, most stocks underperform, most side projects fizzle - and factor this into your assessment

Quitting isn't failure. Quitting is rational resource allocation. The truly expensive mistake isn't stopping - it's continuing to pour resources into something that isn't working, simply because you've already poured resources into it before.