Sunk Cost Fallacy, explained.
The sunk cost fallacy is allowing an irrecoverable past expense to determine a choice that should depend on future costs, benefits, and available alternatives.
Why it happens
Past spending can create pressure to justify an earlier decision. But money that cannot be recovered is unchanged by what you choose next. Relevant differences lie in the consequences of continuing, switching, or stopping from this point onward.
An unrecoverable past cost is common to both choices. A forward-looking comparison asks whether the next expenditure improves the outcome relative to stopping now.
Read the result
Increase past spending without changing future benefits or costs. A rational forward comparison should stay the same. Separately changing a cancellation charge or recoverable asset can legitimately change the choice.
A worked example
Finishing an unwanted course
You paid 100 units for a non-refundable course and have two sessions remaining.
Attending uses time worth 30 units to you but provides only 10 units of future benefit. The past 100 is unchanged by either choice.
Assess the remaining sessions on their future consequences; completing them cannot undo the earlier payment.
OPTIONAL DEEPER DETAILGo deeper: inside the model
Inside this model
Stopping gives a lifetime net result of −sunk. Continuing has expected lifetime result p × revenue − remaining cost − sunk. The difference is p × revenue − remaining cost, independent of sunk expense.
Where this idea is useful
A practical use
A team considering another development milestone should compare its future cost with its future benefit. A large historical budget alone does not justify continuing.
A common misconception
“Ignoring sunk costs means ignoring all history.”
History can reveal quality, probabilities, or commitments. The issue is treating irrecoverable spending itself as an additional benefit of continuing.
What this explanation leaves out
- Risk neutrality, zero salvage value and no alternative project are assumed. Reputation, contractual obligations and information value can matter in an actual decision.
What if stopping has a penalty?
A future cancellation penalty is relevant because the decision can change whether you pay it. The distinction is between consequences you can still affect and expenses you cannot recover.
If you inherited this situation today without making the original purchase, what would you choose next?
Associated thinkers
Further reading
Explore the original research or the teaching reference behind this experiment.