How sunk cost fallacy limits potential & how to overcome it

The term “sunk cost fallacy” might not sound familiar, but you’ve likely fallen victim to it. Maybe you’ve continued watching a movie you didn’t like simply because you already bought a ticket. Or maybe you’ve finished reading a book you would’ve rather quit halfway through because you’d already spent time reading it.

While these examples are minor decisions, sunk cost fallacy can impact all aspects of life. It can affect your work, relationships, and major life decisions. When it seeps into your personal decision-making process, it can become a limiting force against reaching your full potential.

Understanding the sunk cost fallacy and how it operates is key to making better decisions.

The psychology of the sunk cost effect (also called the Concorde fallacy) was first introduced in 1980 by economics professor Richard Thaler. He explored psychological factors that could help explain why consumers sometimes act in a way that is inconsistent with economic theory. He addressed how consumers struggled to ignore sunk costs, which referred to money spent that couldn’t be recovered. 

Later research by psychologists Hal R. Arkes and Catherine Blumer expanded Thaler’s sunk cost definition beyond money to include past investments in time and effort. 

Thaler’s research built off of findings published by Daniel Kahneman and Amos Tversky one year prior. Their research explored a concept called loss aversion. This cognitive bias in behavioral economics aimed to explain why people have a greater tendency to take on risks when they are facing potential losses. Their paper also discussed why people are less willing to take risks when they could gain from it.

Where does the sunk cost fallacy apply?

Although the sunk cost fallacy often applies to business decisions, it can be relevant across all areas of life. While it may seem like a rational choice to continue investing in something you’ve already heavily committed to, this fallacy can lead to irrational decisions. It can impair your judgment and limit your decision-making skills. 

There are times when it may be more reasonable to abandon an idea, even when you’ve “sunk” money or time into it. Because these resources cannot be recovered, some economists refer to the sunk cost fallacy as “throwing good money after bad.”

Human irrationality: why sunk cost fallacies are so hard to avoid

The sunk cost fallacy leads to a decision model that focuses on the effort you’ve already put in instead of achieving the desired results. This can lead to cognitive dissonance, which is the tension you may feel when trying to reckon with opposing pieces of information.

For example, let’s say you’re unhappy in a romantic relationship of 10 years. You may have trouble leaving the relationship because of the amount of time and emotion you’ve already put into it. These feelings may stem from an implicit bias of which you aren’t aware. It can be hard to pinpoint why you feel reluctant to seek change. 

Sunk cost fallacies are a challenge to avoid because you might not be aware it’s happening. You may also fall into beliefs that are pervasive in today’s culture, such as the following:

• The belief that quitting is for losers
• Believing there’s no gain without pain
• The belief that you should feel guilty about not following through with something after taking personal responsibility
• The idea of needing to get your money’s worth

Real examples of sunk cost fallacy 

When you become invested in a failing project or relationship, you may not welcome new opportunities, limiting your personal development and career growth. Recognizing examples of sunk cost fallacy enables you to identify it when you encounter a similar situation.

Sunk cost fallacy examples include the following:

• Sticking with a job even though you feel stuck and unfulfilled
• Refusing to back out of a failing business venture because of a large initial investment
• Thinking you can’t switch college majors because you’ve already invested money for tuition
• Continuing to write a book on a topic that no longer interests you because you’ve already done the research

Personal commitments, such as relationships, can also fall victim to this irrational thought pattern. Sunk cost fallacy relationships tend to be long term. For example, you may choose to stay married to someone you’ve grown apart from because you have children together. You may also choose to stay married because you share expensive assets, like a custom-built house.

How to avoid sunk cost fallacies to maximize potential

Because falling into a sunk cost fallacy can be unconscious, being intentional can help you avoid it. You can increase self-awareness by reflecting on your emotions, looking toward the future, and getting an outside opinion.

Here are six steps you can take to prevent your own sunk cost fallacies.

Practice consistent self-reflection

Making sound, logical decisions requires self-reflection. Assess your feelings and goals and allow them to inform your actions. The more aware you are, the more likely you’ll make decisions with these factors in mind. The self-reflection process can help you understand your decision-making style and how you weigh your options.

Try asking yourself self-reflection questions like the following:

• How can I prioritize my tasks? 
• How can I deal with regrets and embrace growth? 
• Do I spend enough time caring for my physical and mental health each day?
• Am I acting responsibly?
• What could I lose by remaining where I am?

Understand what scares you

You may fall into the sunk cost fallacy mindset because you’re afraid of what might happen if you abandon the situation. Maybe you’re afraid to be alone, so your mind tells you to stay in a relationship with red flags. Maybe you’re worried that you won’t make enough money by changing careers to a job you love. 

The purpose of fear is to act as a warning system when your brain thinks you may be under threat. However, that doesn’t mean fear is always logical. 

Try creating a list of the fears you have about making a decision that might be hard but could ultimately be beneficial. Then go back and ask yourself whether each fear is rational. Brainstorm how you might avoid or adjust to the fear. Changing your perspective can help you improve your habits and make better decisions.

Evaluate decisions based on future value

It’s easy to get caught up in emotions in the present. Try to work around your current feelings by focusing on which decision will bring you the most value down the road. Ask yourself questions like the following:

• What would my life look like in three months if I made this decision? What about in five years?
• Will the decision I make affect other people? How so?
• What advice might my future self give me?
• What regrets could I end up facing?
• What are the long-term consequences of my decision?
• Will the decision impact how people view me in the future?

Making a pros and cons list for future decisions can help you uncover which choice will bring more value to your life.

Confront your emotional attachment

If you’re struggling to abandon a friend with toxic traits, ask yourself what emotions are causing you to second-guess yourself. Do you feel obligated to stay friends with someone because of something they’ve done for you? Are you hoping it will get better because you’re afraid you won’t find new friends?

Write down a list of emotions you feel that might affect your decision. Identifying your feelings can help you look past your emotions and focus on facts and logical reasoning. 

Seek objective advice

Even when you follow the above steps to weigh a decision, you might need an outside opinion to help confirm you’re not blinded by your own emotions. Seeking objective advice can help you explore “what if” scenarios through a different lens that isn’t swayed by personal emotions.

Try running your idea through a trusted family member or friend. Express your feelings and concerns, and ask them for honest feedback.

For a more objective approach, consider enlisting the help of a life coach. A personal coach can help you envision both sides of the coin with less bias.

Understanding your own susceptibility to sunk cost fallacies

At the end of the day, you’re still human. Most people are susceptible to sunk cost fallacies, and that’s OK. It’s how you debate your options and respond that matters.

Sunk cost fallacies also go beyond individuals to affect organizational behavior. They can impact decision-makers at any type of organization, including large corporations, government entities, and sports teams. Keep an eye on barriers that might keep you from reaching your full potential to help you catch these fallacies early.

Reach beyond your sunk cost fallacy to unlock your best inner self

A sunk cost fallacy can negatively impact your decision-making process and prevent you from thriving. The more time you spend on a situation that is no longer worth your effort, the less resources you have to tackle new opportunities.

Working with a BetterUp Coach can help you make more rational, forward-thinking decisions. Your coach can teach you to recognize and overcome your sunk cost fallacies through self-discovery techniques.

Creating the life of your dreams is possible. Uncover how you can make optimal choices that align with your aspirations by working with your best-fit coach.