Financial Word of the Day: Sunk Cost Fallacy
- Larry Jones
- Dec 16, 2025
- 2 min read
Definition of Sunk Cost Fallacy
The sunk cost fallacy is the tendency to continue investing time, money, or effort into something simply because you’ve already invested in it—even when walking away would be the smarter financial decision. A “sunk cost” is a cost that’s already been paid and cannot be recovered. The fallacy happens when past costs influence future decisions.
In plain English: “I’ve already spent so much, I can’t quit now.”
That mindset feels logical. It’s also one of the most expensive thinking errors people make.
A Simple Example of Sunk Cost Fallacy
Imagine you paid $4,000 for a vacation package. A week before the trip, you realize the timing is terrible, you’re burned out, and the trip will likely make things worse—not better.
But you go anyway. Why? Because you already paid for it.
That $4,000 is gone whether you go or not. The real question isn’t “How do I justify the cost?” The real question is: “What decision gives me the best outcome from this point forward?”
The sunk cost fallacy convinces you to chase bad outcomes with good money, good time, and good energy.
Where This Shows Up in Personal Finance
The sunk cost fallacy shows up everywhere:
Investments: Holding onto a losing stock because you “don’t want to sell at a loss,” even when better opportunities exist.
Cars: Keeping an unreliable vehicle because you’ve already spent so much on repairs.
Careers: Staying in a job you hate because of years already invested, instead of focusing on future growth.
Subscriptions and memberships: Paying month after month because “I should use it eventually.”
Notice the pattern: decisions are being driven by the past instead of the future.
Why This Mistake Is So Powerful
The sunk cost fallacy isn’t about math—it’s about emotion.
We hate admitting we were wrong. We hate “wasting” money. And we confuse quitting with failure. But financially speaking, walking away from a bad decision is often the first step toward a good one.
Smart money decisions are forward-looking. They ask:
What will this cost me from here on out?
What am I giving up by sticking with this?
What’s the best use of my next dollar or next hour?
Past costs don’t belong in that equation.
How to Use Sunk Cost Fallacy to Create More Money
Here’s a simple rule you can start using today: Make decisions based on future value, not past pain.
Before spending more time or money, ask yourself: “If I hadn’t already spent anything, would I still choose this?”
If the answer is no, that’s your signal.
Cutting losses isn’t weakness. It’s financial clarity. And clarity is where better money decisions—and more money—begin.
Today’s Takeaway
You can’t recover sunk costs—but you can stop them from sinking you further.
Comments