Sunk cost fallacy: Definition, examples, how to avoid

In January 1976, the supersonic Concorde jet went wheels-up for its first commercial flight after an investment of $2.8 billion from the British and French governments. But even when it became clear that the plane wasn't profitable, investors continued to pour money into the failing project for another 27 years.

This incident gave birth to the term "Concorde fallacy," which describes how people continue with failing endeavors because they've already invested so much. But more commonly, the Concorde fallacy is called by another name: the sunk cost fallacy.

In this article, we'll explain what the sunk cost fallacy is, explore the psychology behind it, and share practical strategies to help you and your team make better decisions.

What is the sunk cost fallacy?

The sunk cost fallacy is a cognitive bias that leads us to continue investing in something because of what we've already invested, even when the current costs outweigh the benefits. It affects decisions big and small: from watching a boring movie you've paid for to refusing to abandon a failing business investment. In common terms, it's often called "throwing good money after bad."

Whenever we fall prey to the sunk cost fallacy, we make irrational decisions that are against our best interests. Understanding how this bias works helps us make good decisions based on logic rather than digging ourselves into a deeper hole.

What is a sunk cost?

In economics, a "sunk cost" is an expense that's already been incurred and can't be recovered. In a logical world, sunk costs shouldn't influence future decisions because they can't be reversed.

Common examples of sunk costs include:

• Money: Funds you've invested in a business project

• Time: Hours spent on a task or years in a relationship

• Effort: Energy devoted to learning a skill or building something

Sunk cost fallacy examples

A sunk cost is anything you've invested that can't be recovered. Here are some sunk cost examples to help you identify situations where you may be influenced by the sunk cost fallacy.

Sunk costs can include:

• Opportunity costs, like the time you've invested that you could have spent on something more productive

• Effort, like tasks that are particularly challenging

• Mental strain, like worry, you've experienced

• Facilities and overhead

• Materials and equipment

• Investments, like purchasing a business

• Annual subscriptions

• Non-refundable business costs, like legal fees or advertising costs

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History of the sunk cost fallacy

The sunk cost fallacy is a type of cognitive bias, a thinking error that makes us misinterpret information and affects our decisions. Psychologists Amos Tversky and Daniel Kahneman first coined the term "cognitive bias" in 1972. In 2002, Kahneman won the Nobel Prize for his work on cognitive biases in business decision-making.

Over the years, behavioral scientists and economists have tried to pinpoint why the sunk cost fallacy happens:

• Richard Thaler first introduced the sunk cost fallacy, concluding that people tend to use a good or service more when they've invested money in it.

• Hal Arkes and Catherine Blumer expanded on Thaler's work in the journal "Organizational Behavior and Human Decision Processes," conducting experiments that illustrated sunk cost psychology in action.

For example, one questionnaire study asked participants to imagine they had accidentally booked two ski trips in one weekend: one $100 trip to Michigan and another $50 trip to Wisconsin. Even though researchers told participants they'd enjoy the Wisconsin trip more, the majority still chose the Michigan trip. Participants selected the option with a greater initial investment, even though they wouldn't enjoy it as much.

The psychology behind the sunk cost fallacy

Researchers in behavioral economics have identified at least five psychological factors that feed into the sunk cost effect:

1. Loss aversion

Loss aversion is the tendency to avoid losses because losing something feels more psychologically powerful than gaining the same thing. For example, winning $100 feels good, but losing $100 feels horrible. With the sunk cost fallacy, loss aversion makes us stick with poor investments because we don't want to feel bad about losing.

2. The framing effect

The framing effect happens when people pick options based on whether they're framed in a positive or negative light. When we follow through on a decision, we can frame it as success. When we don't follow through, we often create a narrative of failure, even if cutting our losses was the logical choice.

For example, imagine you've decided to create a blog campaign. Midway through, you realize the blogs aren't getting traffic, and you'd be better off investing in paid advertising. But in your mind, that would mean your blog campaign was a failure, so you follow through even though your money would be better spent elsewhere.

3. Unrealistic optimism

Unrealistic optimism occurs when people believe they're less likely to experience negative events than others. With the sunk cost fallacy, we overestimate our chances of winning and underestimate our chances of losing, especially when we've invested money. For example, if you funnel thousands of dollars into a new business investment, you're more likely to believe it will pan out regardless of actual evidence.

4. A sense of personal responsibility

When you feel responsible for previous expenditures, you're more likely to fall prey to the sunk cost fallacy. It's relatively easy to change a decision made by someone else, but much harder to discontinue a project you've personally invested in. This makes the sunk cost fallacy most problematic for project creators and decision makers with a vested interest in success.

5. A desire not appear wasteful

Decision-makers may continue with poor investments because they feel bad about wasting money. For example, imagine you've bought a ticket to a movie, but 30 minutes in, you absolutely hate it. You stay for two reasons: you don't want others to think you're wasting money, and you personally feel bad about wasting money.

The same concept applies when you keep using a software tool you've purchased, even though it's not working for your team. You don't want to waste your investment, so you stick it out.

How the sunk cost fallacy affects your work

The sunk cost fallacy doesn't just affect personal decisions. It can have a significant impact on your team and organization, showing up in project management, resource allocation, and strategic planning.

Common workplace examples include:

• Project management: Teams continue investing in underperforming projects because they've already spent months developing them

• Software decisions: Leaders stick with outdated tools because of the time spent training employees, even when better options exist

• Strategic planning: Organizations keep funding initiatives that no longer align with goals because of resources already committed

The consequences can be costly. When teams fall prey to the sunk cost fallacy, they waste time, budget, and energy that could be directed toward more impactful work. Recognizing when this bias is influencing workplace decisions is the first step toward making better choices for your team.

Is the sunk cost fallacy really so bad?

In short, yes. When we let the sunk cost fallacy influence our decisions, we often make bad choices that hurt us. Instead of using logic, we fall prey to a vicious cycle that escalates our commitments.

We continue to invest time, money, and energy into something, even if it's not in our best interest. The more we invest, the more committed we are, and the more resources we funnel into that initial bad decision.

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How to avoid the sunk cost fallacy

Luckily, the sunk cost fallacy isn't a done deal. With these strategies, you can make rational decisions based on logic instead of cognitive bias.

1. Be aware

Just being aware of the sunk cost fallacy is a great first step to avoid its pull. When you understand how this bias works and the psychological factors that feed into it, you can check for cognitive biases each time you make a decision.

To do this, ask yourself the following questions:

• What am I afraid of losing? How is that fear holding me back?

• How have I defined failure and success for this situation? Do those definitions make sense?

• What is the actual probability that my endeavor will succeed?

• What would I do if someone else had decided to invest? What advice would I give to a friend in my situation?

• Am I afraid of appearing wasteful, either to myself or others? Is that fear rational?

2. Make data-based decisions

The sunk cost fallacy defies logic. The best way to combat this thinking trap is to bring logic back into the equation by collecting data to inform your decision-making process.

Here are a few ways to ground your decisions in real-life data:

Set goals before you invest

Before you invest resources in a new project, identify the specific success metrics you want to achieve. Setting measurable goals up front gives you a clear target and a way to measure success. If your project isn't meeting its goals, you have a data-backed reason to adjust your approach or move on.

There are a couple of different ways to set effective goals, including Objectives and Key Results (OKRs) and SMART goals. Both methods focus on setting specific, measurable targets so you have a concrete way to gauge success.

For example, imagine you set a goal to increase product signups by 30% through paid ads over six months. If signups only increased by 10% and ad spend exceeded revenue, your concrete goal provides data-backed evidence to pivot. Instead of falling for the sunk cost fallacy, you can confidently try a new approach.

Track key performance indicators (KPIs)

A key performance indicator is a quantitative metric you can use to track how a project, team, or organization is performing relative to your goals. Setting KPIs before you begin gives you data in hand when you're faced with a decision to end or continue your project.

Examples of KPIs to track include:

• Customer churn rate

• Customer satisfaction scores

• Total number of paying customers

• Revenue per customer

Create a decision matrix

A decision matrix helps you select the best option when comparing multiple choices with several influencing factors. Instead of defaulting to what you've already invested in, you objectively weigh costs and benefits.

For example, when evaluating HR management tools:

This approach helps you make data-driven decisions rather than sticking with your current tool simply because you've already invested in it.

3. Set a cadence to review your strategy

The sunk cost fallacy can be tricky to detect, especially if you don't regularly check your project's performance. A failing project can languish for months if you never consider whether your approach still works. Setting up regular progress reports and check-ins helps you stay on track and reevaluate your project's success.

If you've set goals and KPIs, you already have a way to determine whether your current strategy is working. Depending on your project timeline, check in at the end of each week, month, or quarter.

Using a project management tool can help streamline this process. When you create goals in Asana, you can set a due date and create automated reminders to update your progress. Plus, you can easily share updates with stakeholders so everyone stays informed.

Make better decisions for your team

Just because you've sunk costs into a project doesn't mean you have to go down with the ship. With these strategies, you can let go of the past and make decisions based on what's best for you and your team.

The sunk cost fallacy makes you your own worst enemy, but with self-awareness, you can be the key to your team's success instead.

Ready to make data-driven decisions and track your team's progress more effectively? Get started with Asana to set goals, review progress, and keep your projects on track.

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In this ebook, learn how to equip employees to make better decisions—so your business can pivot, adapt, and tackle challenges more effectively than your competition.

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Frequently asked questions about the sunk cost fallacy