The Lost Cost Trap: What Is the Sunk Cost Fallacy & How Does it Affect Your Finances?

What Is the Sunk Cost Fallacy?

A sunk cost is any cost that’s already been invested and can’t be retrieved.

The sunk cost fallacy (sometimes called the lost cost fallacy or trap) is a cognitive bias that causes people to stick with a plan, course, or approach that isn’t working because of how much has already been invested in it. Investment here can mean money, time, effort, or all three.

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The Psychology of the Sunk Cost Fallacy

There are a few psychological phenomena at work with the sunk cost fallacy. One is our innate aversion to loss. If we change course or get rid of something, we feel that as a loss much stronger than we feel it as a gain—we work hard to avoid losses rather than create gains because losses feel so much more uncomfortable. This aversion bias can be used to bolster a sunk cost fallacy.

Our emotions are also in the mix when we struggle with the sunk cost fallacy. Even the most logical of us have to contend with our emotions, and it can be hard to remember that feelings aren’t facts. Disappointment or guilt over a previous choice or course of action can get in the way of making a change, especially if our choices and actions were publicly committed to—commitment bias.

When we mix in cost—time, effort, or money—we begin to weigh what we’ve already paid against making a change or not following through on something. But what’s been paid has been paid. Instead, the focus should be on the benefits moving forward, not whether or not the costs can be recouped.

Examples of the Sunk Cost Fallacy In Daily Life

Once you’re looking for it, sunk cost fallacy can be found all around us:

• Eating more than you need to because you’ve unintentionally ordered or prepared too much food.
• Finishing a boring book or TV show or movie because you’ve already started it.
• Going to a ticketed event when you’re sick or the weather’s dangerous because you’ve already paid for entry.
• Holding onto clothing that doesn’t fit because it might fit someday.
• Staying in a romantic relationship and waiting for a change or commitment that has not been promised or otherwise seems to be coming.

How Does the Sunk Cost Fallacy Affect Financial Choices?

Sunk costs abound in daily life, so it’s no wonder that we find ourselves up against the sunk cost fallacy time and again. When we spend money on a product or service, we of course want to get the most we can from it and not waste an item or opportunity. To us, this means we’ve spent responsibly.

But if it’s a cost we can’t get back, remember, that’s a sunk cost. Getting your money’s worth has its limits.

The sunk cost fallacy might sneak up on you and your monthly budget in these areas:

• Buying in bulk. While there can be savings to be had by buying in bulk, it might not make sense for you or your household. If you don’t have the space for nonperishables or finish the perishables in time, you’ve missed out on any savings that were possible.
• Club memberships. A paid membership to a bulk-buying club isn’t really valuable if you’re not buying in bulk, just as a gym membership, golf club membership, or any other kind of club membership isn’t worth much if you’re not taking advantage of it.
• Subscriptions. “I’ll read that when I have time.” “I like having the option to watch it.” “I like discovering new things in my monthly shipments.” All of these are just fine reasons to keep up with subscription services like streaming, tons of paid TV channels, magazines and newspapers, and any number of monthly box services for anything from cheese and fruit to makeup and clothes. But take a hard look at how much you actually use these things.
• Investments. From blue-chip stocks to crypto, the desire to hold onto your investments can sometimes be at odds with being on the losing end of a bad choice. Don’t white knuckle it through the bottom falling out of an investment.

When you understand the root of the sunk cost fallacy, you can start working to combat its effects on your budget and quality of life. You may even find ways to cut your spending and boost your savings.