Sunk Costs

Decision-Making · 3 min read

Money you've already spent shouldn't influence what you do next. Your brain disagrees, and that's the problem.

You're 30 minutes into a movie. It's bad. Not "fun-bad". Just genuinely tedious. You've got 90 minutes of your evening left and a hundred better things you could do with them. Do you stay?

Most people stay. The reason they stay is the sunk cost fallacy.

A sunk cost is money (or time, or effort) you've already spent and can't get back. The crucial point, and the part that's hard to accept, is that sunk costs should have zero influence on what you do next. The $15 ticket is gone whether you stay in the theater or walk out. Walking out doesn't get it back. Staying doesn't get it back. The only question that matters is: of the remaining 90 minutes, would you rather be in this theater or somewhere else?

This sounds obvious. In practice, it's one of the most expensive cognitive biases in business.

Companies pour billions into failing products because "we've already spent so much on it." Founders stay in dying startups for years past the point of clarity because "we've come too far." Investors hold onto plummeting stocks because "I'm down 40%, I can't sell now." In every case, the past money is gone. The only real question is: given everything I know right now, would I start this again? If the answer is no, the rational move is to stop. The size of what you've already spent is irrelevant.

The British and French governments famously kept funding the Concorde supersonic jet long after it became clear it would never make economic sense, purely because they'd already spent so much. The phenomenon now has a nickname: the Concorde fallacy.

The fix: when making any decision, mentally cross out everything you've already spent. Ask only: "Given where I am now, what's the best move from here?"