The Sunk Cost Fallacy: Why We Throw Good Money After Bad

Money and time already spent cannot be recovered, yet they shape decisions anyway. Understanding why helps you decide more clearly.

By Iris Penhaligon | Sep 11, 2026 | 4 min

A sunk cost is a cost that has already been incurred and cannot be recovered. In strict economic terms, it should not influence future decisions, which ought to depend only on future costs and benefits.

In practice, people often continue with a project, purchase, or plan because of what they have already put into it. This tendency is known as the sunk cost fallacy.

I Everyday examples

— Sitting through a disappointing film because you paid for the ticket
— Continuing to repair an old car because of the money already spent on it
— Finishing a meal you do not enjoy because it was expensive

II Why it happens

Psychologists link the fallacy to loss aversion, the desire to avoid wasting resources, and the wish to appear consistent. Admitting that past spending was a mistake can feel uncomfortable.

III In business and government

Organisations can keep funding failing projects because of large past investments, a pattern sometimes called escalation of commitment.

IV How to counter it

— Ask whether you would start this project today, knowing what you know now
— Focus on future costs and benefits
— Set decision points and exit criteria in advance
— Get an outside view from someone not invested in the decision

V A caveat

Past spending can contain useful information. The key is to separate information from emotional attachment.

This is general educational information about economics, not financial, investment, or tax advice. Consult a qualified, licensed professional before making financial decisions.

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