Sunk Cost: Revealing Why You Cannot Let Go

In decision-making, sunk costs are costs that have already been incurred and cannot be recovered. It is a sum paid in the past that is — should be, at least — no longer relevant to decisions about the future. Even though in a perfectly rational world sunk costs do not affect future decision-making, people in day-to-day life take previous expenditures into consideration. This is known as the sunk cost fallacy. Its fallacious since the best thing to do at any point in time depends only on current alternatives. The only things that matter are future consequences. Past mistakes are irrelevant. Easier said than done.

It is common knowledge that any costs incurred prior to making a decision have already been incurred and shouldn’t affect you. As the saying goes, you would be “crying over spilt milk”. Its also why you and I tend to continue an endeavor we have invested money, effort, or time into. Cutting your losses is hard. Hence you don’t. People remain in toxic, failing relationships because they have “invested too much to leave.” Individuals caught up in manipulative scams continue investing into the project, despite doubts or suspicions that something is off.

We often run into sunk costs in business decision-making. A common example is promoting a brand name. This is because you cannot really recover the kind of costs this form of marketing incurs. It isn’t possible to just “demote” a brand name in exchange for cash. Another example is investing into a factory or research that has low or no value. For example, 20 million is allocated to a power plant. The value is later realized to be negligible, but the firm is half-way into the project and it is impossible to sell or recover the raw materials. The plant can be completed for an additional 10 million or be repurposed into a more valuable facility for 5 million. The irrational decision-maker will probably take the former option.

Real-world examples of sunk costs:

• Personal Finance: you purchase an expensive gym membership but rarely use it. Instead of cancelling the membership to avoid further waste, you might continue paying for it because of the money already spent. The cost is sunk; future decisions should be based on whether the membership is still valuable.

• Business Projects: a company has invested heavily in a new product line. It isn’t gaining traction. Management might still be reluctant to cut losses due to the significant funds spent. Even if reallocating resources would yield better results. Focusing on future potential rather than past expenditures could be night and day.

• Relationship: you’ve spent years in a relationship that is not fulfilling. But the time invested makes it hard to consider ending it. Continuing the relationship because of the time already spent prevents you from finding a more rewarding partnership. The emotional investment is sunk; the decision should be based on future happiness and compatibility.

• Project Management: an organization continues a software project. Despite it consistently running over budget and behind schedule. The project persists due to the substantial investments already made. In spite of evidence that it is unlikely to succeed. Future investments ought to be evaluated independently of past costs to avoid further losses.

How you can use sunk costs as a mental model: (1) what’s lost is lost — recognize that some expenses and resources cannot be recovered and separate them from future-decision making; (2) be future-oriented — evaluate decisions based on current circumstances and potential future gains and costs, disregarding past investments; (3) embrace the discomfort — be mindful of that emotional pull to justify past investments and remind yourself that continuing a failing venture only makes losses worse and prevents you from other opportunities; (4) make it routine — use these reviews regularly on your projects or decisions to decide whether to continue, pivot, or abandon initiatives based on future potential.