What Is a Sunk Cost?
A sunk cost is money, time, or effort already spent that cannot be recovered. Once it's gone, it's gone — no future decision can bring it back. Rational decision-making says sunk costs should be irrelevant to future choices. Only the future costs and benefits of your options should matter.
In practice, people consistently violate this rule. They let past expenditure influence forward-looking decisions, even when doing so makes them worse off. This is the sunk cost fallacy.
Examples in Everyday Life
The fallacy shows up constantly:
You've paid for a gym membership and feel obligated to use it, even when you'd rather rest or do something else — because "I've already paid." But the membership fee is sunk; it doesn't change whether going to the gym is the best use of your time today.
You sit through a terrible film to the end because you've "already paid for the ticket." But the ticket price is gone regardless of whether you stay or leave. The only question is: is the next two hours better spent watching this film or doing something else?
You continue funding a failing business project because you've "already invested so much." The previous investment is irrelevant to whether the project will succeed going forward.
The Cost in Investing
The sunk cost fallacy is especially damaging in investing. The price you paid for a share is a sunk cost — it has no bearing on whether the share is a good investment today. Yet investors routinely hold losing positions waiting to "get back to break-even," as though the market owes them a recovery to their entry price.
The break-even price is a psychological anchor, not a financial target. The real question is always: given what I know now, is this the best use of this capital? If the answer is no, sunk costs shouldn't prevent you from acting.
Escaping the Trap
The corrective question is simple but powerful: "If I hadn't already spent this, would I choose to continue?" If the answer is no, you're in sunk cost territory. Future decisions should be made on the basis of future value, not past expenditure. Cutting your losses — in investments, projects, or relationships — is not failure. It's rational resource allocation.