You’ve probably done this. You buy a ticket to a concert, then the day arrives and you feel terrible. It’s raining, you’re exhausted, and you’d rather be anywhere else. But you go anyway — because you already paid for it.
Or maybe you’ve held onto a failing investment for months longer than you should have, telling yourself it’ll turn around. Or kept a struggling product line alive in your business because of how much you spent developing it.
This is the sunk cost fallacy in action, and it costs people — and businesses — an enormous amount of money every single year. Understanding it might be one of the most valuable things you can do for your financial decision-making.
What Is the Sunk Cost Fallacy?
A sunk cost is money (or time, or energy) that you’ve already spent and cannot get back. The sunk cost fallacy is the tendency to factor those unrecoverable costs into future decisions — even when logic says you shouldn’t.
Economists and behavioural finance researchers have studied this for decades. The rational approach to any decision is simple: look forward, not backward. The only thing that should matter is what happens from this point on. What have you already spent? Irrelevant. What will you gain or lose going forward? That’s what counts.
But humans aren’t rational machines. We’re wired to feel losses more sharply than equivalent gains — a concept called loss aversion, first described by psychologists Daniel Kahneman and Amos Tversky. Walking away from something we’ve invested in feels like admitting defeat. So we stay. We double down. We throw good money after bad.
Why the Sunk Cost Trap Is So Hard to Escape
The sunk cost trap is sticky for a few powerful psychological reasons.
We Hate Feeling Like We Wasted Something
There’s a deep psychological discomfort in admitting that past spending led nowhere. Cutting your losses forces you to confront that uncomfortable truth. Continuing — even when it makes no financial sense — at least feels like the money still has a chance to mean something.
We Confuse Commitment With Wisdom
Persistence is often celebrated as a virtue. “Don’t give up” is drilled into us from an early age. The problem is that there’s a fine line between admirable persistence and stubborn irrationality. When we keep funding a failing project, we can dress it up as determination. In reality, it’s often just fear of accepting a loss.
Ego Gets Involved
In business especially, decisions are often tied to identity. If you championed a strategy, shutting it down feels like admitting you were wrong. That’s a bruise to the ego. So decisions that should be financial become personal — and that’s when the sunk cost fallacy money problem really starts to compound.
Real-World Examples of Throwing Good Money After Bad
This isn’t just a theory. The sunk cost fallacy plays out in business and investing constantly.
- The failing product launch: A company spends £500,000 developing a product that gets poor market feedback. Instead of pausing to reassess, they spend another £200,000 on marketing to “recoup” the development cost. The product still flops, but now the losses are far greater.
- The underwater investment: An investor buys shares at £50. They drop to £30. Rather than reassessing whether the company still has merit, they buy more to “average down,” hoping to recover their original position. The shares drop to £15.
- The legacy system: A business has been paying to maintain an outdated software system for years. Switching would cost money upfront, but continuing the old system costs more annually. They stick with it because they’ve “already invested so much.”
- The bad hire: A manager keeps an underperforming employee for too long because the onboarding and training investment feels too significant to write off. Meanwhile, the rest of the team suffers.
In every case, the past spending is driving future decisions in ways that make the final outcome worse. That’s the trap in a nutshell.
The Poker Player’s Framework: Fold Discipline
Here’s where things get genuinely useful. If you want a practical mental model for when to cut your losses, look no further than professional poker.
Great poker players fold — a lot. In fact, the best players in the world fold the majority of hands they’re dealt. They understand something crucial: the chips you’ve already put in the pot are gone. They belong to the pot now, not to you. The only question worth asking is whether the hand you’re holding right now justifies putting more chips in.
This is called fold discipline, and it’s a direct, practical antidote to the sunk cost trap.
How to Apply Poker Fold Discipline to Business Decisions
The mental shift is straightforward, even if it’s emotionally difficult. When you’re facing a decision about whether to continue investing in something — a project, a product, a strategy, a staff member — ask yourself this one question:
“If I were starting fresh today, with no prior investment, would I choose to put money into this?”
If the answer is no, you have your answer. The sunk costs are the pot. They’re gone. The only rational decision is based on what the hand looks like now.
Poker players train themselves to feel this instinctively. Business leaders and investors can do the same. Here’s a simple framework to build that habit:
- Strip out the history: When reviewing a struggling initiative, deliberately remove past spending from the conversation. Evaluate it purely on current performance and future potential.
- Set decision triggers in advance: Before you start a project, agree on the specific metrics that would tell you it isn’t working. When those triggers are hit, make the call. Pre-committing to exit criteria removes emotion from the equation later.
- Reframe walking away as smart, not weak: In poker, a well-timed fold is a sign of skill and discipline. In business, the same applies. Cutting a losing position early and redeploying that capital elsewhere is a strength, not a failure.
- Separate the decision from the decision-maker: Where possible, bring in someone with no emotional investment in the outcome to assess whether continued spending is justified. Fresh eyes see clearly.
- Ask “what would I advise a friend?”: We’re far more rational when it comes to other people’s problems. If a colleague described the same situation, what would you tell them to do?
When Persistence IS the Right Call
It’s worth saying clearly: not every struggling project should be abandoned. The sunk cost fallacy is about letting past spending drive future decisions irrationally — but sometimes continuing is genuinely the right move.
The key is making sure your decision to continue is based on forward-looking reasoning, not backward-looking justification. There’s a meaningful difference between:
- “We should keep going because we’ve invested so much already” — sunk cost thinking
- “We should keep going because the market data shows we’re close to product-market fit” — rational forward thinking
The question is always: what does the future look like from here? If the honest answer is promising, continue. If the honest answer is bleak, fold.
Building a Culture That Avoids the Sunk Cost Trap
For businesses, this isn’t just about individual decisions. It’s about culture. Organisations that punish people for cutting losses — or that celebrate throwing good money after bad as “commitment” — will consistently make worse financial decisions.
Some of the most successful companies in the world have built processes specifically designed to counter sunk cost thinking. Amazon famously uses a “disagree and commit” principle combined with a willingness to kill projects that aren’t working, regardless of what went into them. Jeff Bezos has talked publicly about the importance of being willing to be wrong and move on quickly.
Creating an environment where it’s safe to say “this isn’t working, let’s stop” is one of the most valuable things a business leader can do. It protects capital, frees up resources, and keeps the organisation focused on what actually has potential.
The Bottom Line
The sunk cost fallacy is one of the most common and costly mental traps in personal finance and business alike. The money, time, or energy you’ve already spent cannot be recovered — and letting it drive your future decisions will almost always make things worse.
The poker fold is your friend here. Strip out the history, look at the hand in front of you, and ask whether it’s worth playing. Sometimes the smartest, most disciplined move you can make is to put your cards down and wait for a better opportunity.
Knowing when to cut your losses isn’t giving up. It’s what separates good decision-makers from great ones.
