What Is a Sunk Cost? Examples and How to Avoid the Fallacy

A sunk cost is a cost you have already incurred and cannot recover, regardless of what you decide now. The concept also applies to time and effort you have already spent. When deciding what to do next, separate those irrecoverable costs from the benefits and costs that would change under each option.

What is a sunk cost?

The defining feature of a sunk cost is that your current decision cannot recover it. Having paid for something does not automatically make the entire payment a sunk cost: you may still be able to recover some money through a refund or resale.

Suppose you bought a concert ticket for 100,000 South Korean won (KRW), and you cannot get a refund or transfer the ticket. Whether you attend or stay home, you cannot get that 100,000 won back. From your current position, the ticket price is a sunk cost. What can still change is the enjoyment you get from the concert, the money and time needed to travel there, and the opportunity to do something else.

Now suppose you could receive a 30,000-won refund by not attending. That changes the decision: you need to consider whether attending is worth giving up the refund. Before setting an earlier payment aside, check how much you can actually recover.

OpenStax's explanation of relevant costs in decision-making distinguishes costs that have already occurred and remain unchanged across options from costs that depend on the choice you make.

Why does the sunk cost fallacy happen?

The sunk cost fallacy occurs when concern about wasting money, time, or effort already spent distorts your comparison of future benefits and costs. A sunk cost is an irrecoverable expense; the fallacy is the judgment error that can arise when that expense influences what you do next.

Return to the concert example. You feel unwell and judge that attending would be more burdensome than enjoyable, yet decide, "I paid 100,000 won, so I have to go." That reasoning may reflect the fallacy. Attending the concert is not inherently a mistake, however. If you still expect to enjoy it enough to justify the remaining effort and expense, going can be a reasonable choice.

The discomfort of having spent money can involve a desire to avoid feeling wasteful. In their 1985 study, The psychology of sunk cost, Arkes and Blumer examined the tendency to persist after investing money, effort, or time, and presented the desire not to appear wasteful as an explanation. A single psychological explanation does not account for every decision in every situation.

When you think, "I've come too far to stop now," look for a concrete reason to continue. Are you describing a benefit you can still obtain, or repeatedly pointing to what you have already spent? That distinction is a useful starting point.

How do sunk costs affect everyday decisions?

Should you finish an online course that does not suit your needs?

Imagine buying an online course and discovering, after a few lessons, that it does not fit your current goal. The refund window has closed, and you cannot recover the fee. That payment is a sunk cost. Finishing every lesson will not necessarily reduce the waste.

If some remaining lessons are useful, you could study only those sections. If spending another ten hours would teach you little, while another resource would serve your goal better, you could change your approach. The decision requires you to consider the value of the time you would spend from now on.

Opportunity cost is the value of the next-best alternative you give up when making a choice. Other study or rest you could enjoy during those hours may be relevant alternatives. See OpenStax's explanation of opportunity cost for the definition.

Continuing a project can make sense even after an overall loss

Consider a hypothetical project with all amounts in South Korean won. You have already spent 2,000,000 won, none of which can be recovered under either option. You expect that spending another 300,000 won will let you finish and receive 800,000 won in revenue. If you stop, there will be no further spending or revenue, and no refund or proceeds from selling project assets.

Under these assumptions, continuing produces an expected net cash inflow of 500,000 won from this point forward. Including the earlier spending, the total loss would be 1,500,000 won if you continue and 2,000,000 won if you stop. An overall loss alone does not establish that stopping is the better choice.

In a real decision, you would also consider the remaining work, the opportunity cost of giving up other projects, possible cost overruns, and uncertainty about revenue. The table is a simplified comparison that leaves those factors out. The reason to continue is the result you can obtain from your next decision, rather than regret over the 2,000,000 won already spent.

How to reduce the sunk cost fallacy in your decisions

If you are unsure whether to continue or stop, write down the following points. Putting the comparison on paper can help separate past spending from the conditions that still affect your choice.

1. List your current options clearly. Along with continuing or quitting, consider pausing, reducing the scope, or switching methods. For an online course, studying only the useful sections may be an option between completing everything and stopping entirely.
2. Separate what you can recover from what you cannot. Check available refunds, resale proceeds, and resources you can use elsewhere. You cannot recover time already spent, but you may still be able to use the knowledge or work it produced.
3. Compare future benefits and costs over the same period. Use a consistent timeframe, such as the next month, for spending, time requirements, and expected results. Include comparable factors for each option; do not count only cash expenses for one option while including time burdens for the other.
4. Distinguish estimates from verified facts. Check additional expenses against quotes or contract terms, and write down the basis for the benefits you expect. Consider whether the choice would still be acceptable if revenue or results were lower than hoped.
5. Set a point and conditions for reviewing the decision. If uncertainty remains, limit the additional budget and time to an amount you can afford, and decide in advance what result you will check. For example: "I will study two more key lessons and see whether they help me complete an actual assignment."

A useful supporting question is: "If I had not started this activity, but still had my current knowledge and resources, would I commit the remaining cost to it now?" Remember to include conditions that still matter, such as existing contracts and commitments to other people.

Important limits when applying sunk cost reasoning

Understanding sunk costs does not mean discarding every piece of information connected with the past. Distinguish the irrecoverable expense itself from the resources, obligations, and information that remain relevant today.

• Continuing is not automatically a mistake. You can reasonably continue if the value you expect to gain justifies the remaining costs and risks. Base the decision on current conditions, rather than how long you have already been involved.
• Account for the costs of stopping. Cancellation penalties, winding-down expenses, and time needed for a handover can depend on your current choice. Ignoring them together with past payments would distort the comparison.
• Fixed costs and sunk costs are different concepts. A fixed cost stays constant as production or usage changes within the relevant range. Being fixed does not by itself make a cost irrecoverable or unavoidable. Check the contract period and termination conditions separately.
• Past experience can inform your next decision. Time already spent cannot be recovered, but what you learned about your interests, the task's difficulty, or your working speed can help you estimate future results. Distinguish useful evidence from an urge to justify earlier spending.

Feeling reluctant to waste what you have spent is understandable. Acknowledge the feeling, then check whether you can explain your final choice in terms of what you can still gain and what you still need to commit.