Definition · Plain-language
Sunk cost fallacy
The sunk cost fallacy is the tendency to continue an investment — of time, money or effort — based on what has already been spent rather than on what is rational going forward.
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Sunk costs versus opportunity costs
A sunk cost is any past expenditure that cannot be recovered regardless of what you decide next. Economists argue that sunk costs should be ignored in forward-looking decisions: what matters is whether the future benefits of continuing exceed the future costs. Conflating sunk costs with relevant data is the fallacy. By contrast, opportunity costs — the value of the best alternative forgone — are genuinely relevant to a decision. Continuing a failing project because of money already spent prevents that capital and effort from being redeployed to better uses.
The Concorde fallacy and Arkes & Blumer 1985
The "Concorde fallacy" — named after the Anglo-French supersonic airliner — is perhaps the most cited real-world example. After enormous costs had been sunk into development, both governments continued funding because they could not bear to "waste" what they had already spent, even when independent analysis showed the project would never be commercially viable. In 1985, Hal Arkes and Catherine Blumer published the foundational experimental study of the fallacy, demonstrating with controlled experiments that people systematically let prior expenditure influence choices that should rest on future costs and benefits alone.
Thaler, escalation of commitment, and how to counter the bias
Richard Thaler's (1980) mental accounting theory helps explain the fallacy: people treat money in separate mental "accounts" and feel that abandoning a project writes off the sunk-cost account as a loss, triggering loss aversion. Barry Staw (1976) documented escalation of commitment — the tendency for decision-makers to increase investment in a failing course of action to justify earlier choices. Counter-strategies include prospective thinking (evaluate options as if you had no prior investment), pre-mortems (imagine the project has failed and work backwards), and institutional rules that require independent review before further funding is committed.
Key facts
At a glance
- Definition: continuing because of past investment rather than future value
- Type: cognitive bias and informal logical error
- Key principle: sunk costs are irrecoverable and logically irrelevant to future decisions
- Concorde fallacy: continuing despite evidence of commercial failure because of prior spend
- Arkes & Blumer 1985: experimental demonstration of the bias
- Thaler 1980: mental accounting and loss aversion as mechanisms
- Staw 1976: escalation of commitment in organisational decisions
- Counter: prospective thinking, pre-mortems, independent review gates
Common misconceptions
What people often get wrong
Often heard: Considering past investment when making decisions is always rational.
Actually: Past investment is only relevant if it changes the future costs or benefits of your options — which sunk costs, by definition, do not. Rational decision-making considers only what you can still influence going forward.
Often heard: Stopping a project you have invested in is "wasting" money.
Actually: The money was spent regardless. Continuing a bad project wastes additional resources; stopping simply limits further losses. The sunk cost is equally "wasted" whether you continue or stop.
Often heard: The sunk cost fallacy is purely a financial error.
Actually: The fallacy applies to any irrecoverable resource: time spent in a bad relationship, effort invested in a failing career path, or years spent studying a subject you no longer want to pursue. The logic is identical across domains.
Common questions
FAQ
What is the sunk cost fallacy in simple terms?+
It is the error of continuing something you would not start fresh today, simply because you have already spent time, money or effort on it. Because that investment is gone regardless, it should not drive your next decision — only the future costs and benefits matter.
What is the Concorde fallacy?+
The Concorde fallacy is a famous instance of the sunk cost fallacy in which Britain and France continued funding the Concorde supersonic aircraft long after independent assessments showed it would not be commercially viable, because both governments felt they could not abandon such large prior expenditure.
How do you avoid the sunk cost fallacy?+
The core technique is prospective thinking: ask yourself what you would choose if you were starting from scratch today with no prior investment. Pre-mortems, where you imagine the project has failed and identify why, and independent review gates in organisations, also help counteract the bias.
Going deeper
