Sunk Cost: Meaning, Types, and How To Avoid Fallacy

We often continue with certain decisions simply because we have already spent money, time, or effort on them—even when it no longer makes sense to do so. This behaviour stems from a psychological bias called the sunk cost fallacy. In financial and personal contexts, this can lead to poor decision-making, wasted resources, and reduced efficiency. This article explains what sunk cost means, how it shows up in daily life and investing, and how to avoid letting past costs dictate future decisions.

A sunk cost refers to money already spent on a past expense that cannot be retrieved or reversed. It may be in the form of time, effort, or money. Once spent, this cost should no longer influence your future decisions, as it cannot be reclaimed regardless of what happens next.

People often struggle to ignore sunk costs due to emotional attachment, fear of loss, or a desire to avoid regret. This leads to the sunk cost fallacy, where one continues with an activity or investment only because of prior commitment rather than evaluating its current value.

Sunk costs are not limited to money—they come in different forms across personal, professional, and financial domains. Here are the most common types:

Monetary Sunk Costs

These include non-refundable expenses like:

• Booking fees for travel or events
  

• One-time setup or registration costs
  

• Cancelled project costs in business
  

• Non-recoverable marketing or advertising spends
  

Time-Based Sunk Costs

These are the hours or days spent on activities or projects that no longer serve your objectives, such as:

• Continuing a course that no longer aligns with your career
  

• Watching a film you aren’t enjoying, just because you’ve already watched half
  

• Staying in long meetings that are no longer relevant to your role
  

Effort-Based Sunk Costs

Investments of energy and effort also become sunk costs when they no longer contribute to a goal. For example:

• Training employees who leave shortly after
  

• Developing products that never launch
  

• Writing drafts of proposals that are never submitted
  

Understanding these forms helps to recognise when you may be holding onto something unnecessarily.

The sunk cost fallacy occurs when a person continues an endeavour due to the resources already spent on it, rather than evaluating its present and future value.

This fallacy is irrational because it focuses on past losses instead of weighing current benefits and costs. It traps individuals, companies, and even governments into throwing more resources into ventures that no longer make sense.

Examples include:

• Finishing a bad book because you’ve already read 100 pages
  

• Investing more money into a declining stock to avoid booking a loss
  

• Persisting with a failing business project because it consumed months of work

Ignoring the reality of sunk costs can lead to poor decision-making. Here’s how it affects individuals and businesses:

• Wasted resources: Time and money continue to be spent with no returns
  

• Emotional strain: Regret and frustration build over ongoing failure
  

• Lost opportunities: Better options are missed because energy is tied up
  

• Reduced efficiency: Delays in decision-making lead to stagnation
  

Avoiding this fallacy enables more rational, flexible, and proactive choices that improve outcomes over time.

The sunk cost fallacy can affect decision-making when past investments weigh more heavily than future outcomes. Understanding how it works can help in recognising when this bias might arise.

Reframe the Decision

Looking at a choice as if no prior resources had been spent helps in understanding whether the decision is based on future value or past commitments.

Focus on Future Gains

In behavioural studies, decisions are often considered stronger when they are assessed on expected future outcomes rather than historical costs.

Set Clear Exit Criteria

Some individuals and organisations pre-define points at which they will reassess progress. This helps reduce emotional attachment and makes the process more structured.

Separate Emotion from Logic

Acknowledging that emotions can play a role in decision-making is important. Awareness of this influence allows for a more balanced perspective.

Accept Mistakes as Part of Growth

Past investments that don’t yield results are part of the learning curve. Recognising them as experiences rather than losses can help build resilience.

Use the Zero-Based Thinking Approach

A common reflective tool in behavioural finance is asking, “If I were to decide today with current knowledge, would I start this again?” This highlights the difference between past costs and present judgment.

In the stock market, the sunk cost fallacy may present itself in multiple ways. Being aware of them helps investors make more rational financial decisions.

Holding Loss-Making Stocks

Investors often hold on to underperforming stocks hoping they’ll recover just because they’ve already incurred losses. This may delay more productive reallocation of funds.

Continuing SIPs in Irrelevant Funds

Persisting with a Systematic Investment Plan (SIP) in a fund no longer aligned with your goals, just because you’ve already contributed to it.

Averaging Down Blindly

Buying more of a falling stock without evaluating its fundamentals, purely to reduce the average purchase price.

Avoiding these behaviours requires an objective review of your financial strategy and readiness to shift when conditions change.

The fallacy is deeply rooted in human psychology:

• Loss aversion: People prefer avoiding losses over acquiring equivalent gains
  

• Commitment bias: Once we commit, we feel the need to justify that decision
  

• Social pressure: Quitting is often perceived negatively
  

• Ego and pride: Admitting a past decision was wrong is difficult
  

Understanding these biases helps you challenge them consciously.

Sunk costs are a reality of life and business—but they need not trap us in unproductive decisions. Rational thinking requires evaluating options based on future benefits, not past losses. By recognising sunk cost situations, reframing decisions, and setting logical benchmarks, you can make choices that serve your goals better and prevent ongoing waste of resources.

This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.