Sunk Cost Fallacy: What It Is and Why It Matters at Work

The Concorde supersonic jet was a financial disaster for decades before it was finally retired in 2003. The British and French governments kept funding it long after the economics stopped making sense — partly because they’d already spent so much. Economists now call this pattern the “Concorde fallacy.” Psychologists have a broader name for it.

Definition

The sunk cost fallacy is the tendency to continue investing in a decision — time, money, effort — because of what’s already been spent, rather than evaluating the decision based on future costs and benefits alone. Rationally, past expenditures that can’t be recovered shouldn’t influence forward-looking decisions. In practice, they almost always do.

The concept was formalized by behavioral economists Richard Thaler and Hal Arkin in the early 1980s, though its roots trace to earlier work by Kahneman and Tversky on loss aversion — our disproportionate sensitivity to losses versus equivalent gains.

Why It Happens

Two psychological forces drive the sunk cost fallacy:

• Loss aversion. Abandoning a project means acknowledging that prior investment was wasted. The brain processes this as a realized loss, which feels roughly twice as painful as an equivalent gain feels good.
• Commitment and consistency bias. Once we’ve publicly committed to a course of action, reversing that decision threatens our self-image as rational, consistent decision-makers. It’s easier to double down than to admit the original call was wrong.

How It Shows Up at Work

Product development. A team has spent 18 months building a feature that market testing shows customers don’t want. Rather than killing the project, leadership approves another quarter of development because “we’re already so close.” The question they should be asking isn’t “how much have we spent?” but “if we were starting from zero today, would we fund this?”

Hiring and retention. Managers often keep underperforming employees far too long because of the time invested in recruiting, onboarding, and training them. The reasoning — “we’ve already put six months into developing this person” — treats those six months as recoverable. They aren’t. Every additional month spent hoping for improvement is a new cost, not a continuation of the old one.

Strategic pivots. Companies resist pivoting away from declining business models because their infrastructure, talent, and brand are built around the existing model. Kodak’s leadership understood digital photography was the future as early as the 1980s. They couldn’t let go of film because their entire organization represented a massive sunk cost in analog technology.

The “Zero-Based” Antidote

The most effective counterweight to the sunk cost fallacy is what some decision scientists call “zero-based thinking.” Before committing additional resources, ask: “Knowing what I know now, would I start this project from scratch?” If the answer is no, continuing isn’t perseverance. It’s inertia wearing the mask of commitment.

Some organizations formalize this through “kill criteria” — predetermined thresholds that trigger automatic project reviews. Setting these criteria before emotional investment builds up makes it easier to walk away when the data warrants it.

Common Misconceptions

“Quitting is always the answer.” The sunk cost fallacy doesn’t mean you should abandon every struggling initiative. It means prior spending shouldn’t be the reason you continue. Sometimes the forward-looking case for continuing is strong — but that case needs to stand on its own, independent of what’s already been spent.

“Only irrational people fall for this.” Research shows that training in economics reduces but doesn’t eliminate the sunk cost fallacy. Even professional investors and experienced executives exhibit the pattern, particularly when decisions are made publicly and their reputation is tied to the outcome.

Related Terms

• Loss Aversion — the tendency to feel losses more acutely than equivalent gains
• Cognitive Bias — systematic patterns of deviation from rational judgment
• Confirmation Bias — seeking information that supports existing commitments

FAQ

How is the sunk cost fallacy different from perseverance? Perseverance is continuing because you believe the future payoff justifies the future cost. The sunk cost fallacy is continuing because you can’t bear to “waste” what you’ve already spent. The distinction lies in whether your reasoning is forward-looking or backward-looking.

Can organizations design systems to prevent the sunk cost fallacy? Yes. Stage-gate processes, independent review boards, and pre-commitment to kill criteria all help. The key is separating the people who evaluate a project’s future potential from the people whose identities are invested in its past.