Sunk Costs and the Money You Already Lost

Intermediate

The most expensive word in finance is 'but I already put in...'

01 The Concept

Money already spent and unrecoverable is a sunk cost, and it should be completely irrelevant to what you do next — the only rational question is whether the future costs of continuing are worth the future benefits. But humans are extraordinarily bad at this. Having invested money, time, or effort makes people persist with failing courses of action specifically because they've already invested, which is exactly backwards.

In money terms this shows up as holding a losing stock to 'get back to even' (the stock doesn't know what you paid), pouring repairs into a car that keeps failing, or staying in a bad investment because exiting means admitting the loss. The loss already happened; the only choice is whether to add to it. A useful reframe: if you didn't already own this position, would you buy it today at this price? If no, the only thing keeping you in it is the money you can't get back anyway.

02 Case Study

CASEArkes & Blumer, 'The Psychology of Sunk Cost,' *Organizational Behavior and Human Decision Processes* (1985); Concorde development, cited as the 'Concorde fallacy'

Hal Arkes and Catherine Blumer demonstrated the effect with an experiment elegant enough to be repeated in textbooks ever since. Participants were told they'd spent $100 on a ticket to a Michigan ski trip and $50 on a ticket to a better Wisconsin ski trip, then discovered the trips were on the same weekend and the tickets were non-refundable. Over half chose the $100 Michigan trip — the one they'd explicitly been told they'd enjoy less. The $100 was gone either way; the only live question was which weekend they'd rather have. They chose to have a worse time in order to honor money they couldn't recover. The same logic gave the phenomenon its other name: Britain and France continued funding Concorde for years after it was clear it would never be commercially viable, precisely because they had already spent so much — the 'Concorde fallacy.'

→ Why it matters

Arkes and Blumer showed people will deliberately choose a worse experience to avoid 'wasting' money that's already gone. Sunk costs feel like reasons to continue; they're the one thing that should carry zero weight.

03 Key Points

01Sunk costs are unrecoverable and should be irrelevant to future decisions

02People persist with failures because of prior investment — precisely backwards

03Holding a loser to 'get back to even' is sunk-cost thinking; the asset doesn't know your purchase price

04Reframe: if you didn't own it, would you buy it today at this price?

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